2016-12612

[Federal Register Volume 81, Number 104 (Tuesday, May 31, 2016)]

[Rules and Regulations]

[Pages 34817-34854]

From the Federal Register Online via the Government Publishing Office [www.gpo.gov]

[FR Doc No: 2016-12612]

[[Page 34817]]

Vol. 81

Tuesday,

No. 104

May 31, 2016

Part VI

Commodity Futures Trading Commission

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17 CFR Part 23

Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap

Participants--Cross-Border Application of the Margin Requirements;

Agency Information Collection Activities: Proposed Collection, Comment

Request: Final Rule, Margin Requirements for Uncleared Swaps for Swap

Dealers and Major Swap Participants--Cross-Border Application of the

Margin Requirements; Final Rule and Notice

Federal Register / Vol. 81 , No. 104 / Tuesday, May 31, 2016 / Rules

and Regulations

[[Page 34818]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AC97

Margin Requirements for Uncleared Swaps for Swap Dealers and

Major Swap Participants--Cross-Border Application of the Margin

Requirements

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: On January 6, 2016, the Commodity Futures Trading Commission

(``Commission'' or ``CFTC'') published final regulations to implement

section 4s(e) of the Commodity Exchange Act, which requires the

Commission to adopt initial and variation margin requirements for

uncleared swaps of swap dealers and major swap participants that do not

have a Prudential Regulator (collectively, ``Covered Swap Entities'' or

``CSEs''). In this release, the Commission is adopting a rule to

address the cross-border application of the Commission's margin

requirements for CSEs' uncleared swaps.

DATES: The final rule is effective August 1, 2016.

FOR FURTHER INFORMATION CONTACT: Laura B. Badian, Assistant General

Counsel, 202-418-5969, [email protected]; Paul Schlichting, Assistant

General Counsel, 202-418-5884, [email protected]; or Elise

(Pallais) Bruntel, Counsel, (202) 418-5577, [email protected]; Office

of the General Counsel, Commodity Futures Trading Commission, Three

Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

A. Introduction

B. Key Considerations in the Cross-Border Application of the

Margin Regulations

II. The Final Rule

A. Key Definitions

1. U.S. Person

a. Proposed Rule

b. Comments

c. Final Rule

2. Guarantees

a. Proposed Rule

b. Comments

c. Final Rule

3. Foreign Consolidated Subsidiary (``FCS'')

a. Proposed Rule

b. Comments

c. Final Rule

4. Counterparty Representations

B. Applicability of Margin Requirements To Cross-Border

Uncleared Swaps

1. Proposed Rule

2. Substituted Compliance

a. Comments

b. Final Rule

3. Exclusion

a. Comments

b. Final Rule

4. Special Provisions for Non-Segregation Jurisdictions

a. Comments

b. Final Rule

5. Special Provisions for Non-Netting Jurisdictions

a. Comments

b. Final Rule

C. Comparability Determinations

1. Proposed Rule

2. Comments

3. Final Rule

III. Related Matters

A. Regulatory Flexibility Act

B. Paperwork Reduction Act

1. Information Collection--Comparability Determinations

2. Information Collection--Non-Segregation Jurisdictions

3. Information Collection--Non-Netting Jurisdictions

C. Cost-Benefit Considerations

1. Introduction

2. Key Definitions

a. U.S. Person

b. Guarantees

c. Foreign Consolidated Subsidiary

3. Application

a. Substituted Compliance

b. Exclusion

c. Non-Segregation Jurisdictions and Non-Netting Jurisdictions

4. Comparability Determinations

5. Section 15(a) Factors

a. Protection of Market Participants and the Public

b. Efficiency, Competitiveness, and Financial Integrity

c. Price Discovery

d. Sound Risk Management Practices

e. Other Public Interest Considerations

Table A--Application of the Final Rule

I. Background

A. Introduction

In the wake of the 2008 financial crisis, Congress enacted Title

VII of the Wall Street Reform and Consumer Protection Act (``Dodd-Frank

Act''),\1\ which modified the Commodity Exchange Act (``CEA'') \2\ to

establish a comprehensive regulatory framework for swaps. A cornerstone

of this framework is the reduction of systemic risk to the U.S.

financial system through the establishment of margin requirements for

uncleared swaps. CEA section 4s(e), added by section 731 of the Dodd-

Frank Act, directs the Commission to adopt rules establishing minimum

initial and variation margin requirements on all swaps that are not

cleared by a registered derivatives clearing organization (``DCO'').\3\

To offset the greater risk to the swap dealer or major swap participant

and the financial system arising from the use of uncleared swaps, the

Commission's margin requirements must (i) help ensure the safety and

soundness of the swap dealer or major swap participant, and (ii) be

appropriate for the risk associated with the uncleared swaps held as a

swap dealer or major swap participant.\4\ Under CEA section 4s(e), the

Commission's margin requirements apply to each swap dealer or major

swap participant for which there is no Prudential Regulator

(collectively, ``Covered Swap Entities'' or ``CSEs'').\5\ The

Commission published final margin requirements for CSEs in January

2016.\6\

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\1\ Public Law 111-203, 124 Stat. 1376 (2010).

\2\ 7 U.S.C. 1 et seq.

\3\ See 7 U.S.C. 6s(e)(2)(B)(ii).

\4\ 7 U.S.C. 6s(e)(3)(A).

\5\ See 7 U.S.C. 6s(e)(1)(B). Swap dealers and major swap

participants for which there is a Prudential Regulator must meet the

margin requirements for uncleared swaps established by the

applicable Prudential Regulator. 7 U.S.C. 6s(e)(1)(A). See also 7

U.S.C. 1a(39) (defining the term ``Prudential Regulator'' to include

the Board of Governors of the Federal Reserve System; the Office of

the Comptroller of the Currency; the Federal Deposit Insurance

Corporation; the Farm Credit Administration; and the Federal Housing

Finance Agency). The Prudential Regulators published final margin

requirements in November 2015. See Margin and Capital Requirements

for Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015) (``Prudential

Regulators' Final Margin Rule'').

\6\ See Margin Requirements for Uncleared Swaps for Swap Dealers

and Major Swap Participants, 81 FR 636 (Jan. 6, 2016) (the ``Final

Margin Rule''). The Final Margin Rule, which became effective April

1, 2016, is codified in part 23 of the Commission's regulations. See

17 CFR 23.150-159, 161.

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In July 2015, consistent with its authority in CEA sections 4s(e)

and 2(i),\7\ the Commission proposed a rule to address the cross-border

application of the Commission's margin requirements (the ``proposed

rule'').\8\ The proposed rule set out the circumstances under which a

CSE would be allowed to satisfy the Commission's margin requirements by

complying with comparable foreign margin requirements

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(``substituted compliance''); offered certain CSEs a limited exclusion

from the Commission's margin requirements (the ``Exclusion''); and

outlined a framework for assessing whether a foreign jurisdiction's

margin requirements are comparable to the Commission's requirements

(``comparability determinations''). The Commission developed the

proposed rule after close consultation with the Prudential Regulators

and in light of comments from and discussions with market participants

and foreign regulators.\9\

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\7\ See 7 U.S.C. 2(i). Section 2(i) of the CEA states that the

provisions of the CEA relating to swaps that were enacted by the

Wall Street Transparency and Accountability Act of 2010 (including

any rule prescribed or regulation promulgated under that Act), shall

not apply to activities outside the United States unless those

activities (1) have a direct and significant connection with

activities in, or effect on, commerce of the United States; or (2)

contravene such rules or regulations as the Commission may prescribe

or promulgate as are necessary or appropriate to prevent the evasion

of any provision of this Act that was enacted by the Wall Street

Transparency and Accountability Act of 2010.

\8\ See Margin Requirements for Uncleared Swaps for Swap Dealers

and Major Swap Participants--Cross-Border Application of the Margin

Requirements, 80 FR 41376 (July 14, 2015) (``Proposal'').

\9\ In 2014, in conjunction with reproposing its margin

requirements, the Commission requested comment on three alternative

approaches to the cross-border application of its margin

requirements: (i) A transaction-level approach consistent with the

Commission's guidance on the cross-border application of the CEA's

swap provisions, see Interpretive Guidance and Policy Statement

Regarding Compliance with Certain Swap Regulations, 78 FR 45292

(July 26, 2013) (``Guidance''); (ii) an approach consistent with the

Prudential Regulators' proposed cross-border framework for margin,

see Margin and Capital Requirements for Covered Swap Entities, 79 FR

57348 (Sept. 24, 2014) (``Prudential Regulators' Proposed Margin

Rule''); and (iii) an entity-level approach that would apply margin

rules on a firm-wide basis (without any exclusion for swaps with

non-U.S. counterparties). See Margin Requirements for Uncleared

Swaps for Swap Dealers and Major Swap Participants, 79 FR 59898

(Oct. 3, 2014) (``Proposed Margin Rule''). Following a review of

comments received in response to this release, the Commission's

Global Markets Advisory Committee (``GMAC'') hosted a public panel

discussion on the cross-border application of margin requirements.

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The Commission requested comment on all aspects of the proposed

rule. After a careful review of the comments,\10\ the Commission is

adopting a final rule largely as proposed but with some modifications,

as described below (the ``Final Rule'').\11\

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\10\ The Commission received eighteen comment letters in

response to the Proposal: Alternative Investment Management

Association and Investment Association (Sept. 11, 2015) (``AIMA/

IA''); American Bankers Association and ABA Securities Association

(Sept. 14, 2015) (``ABA/ABASA''); American Council of Life Insurers

(Sept. 14, 2015) (``ACLI''); Americans for Financial Reform (Sept.

14, 2015) (``AFR''); Chris Barnard (Sept. 14, 2015) (``Barnard'');

Better Markets, Inc. (Sept. 14, 2015) (``Better Markets'');

Financial Services Roundtable (Sept. 14, 2015) (``FSR''); FMS-

Wertmanagement (Sept. 14, 2015) (``FMS-WM''); Institute for

Agriculture and Trade Policy (Sept. 14, 2015) (``IATP''); Investment

Company Institute Global (Sept. 14, 2015) (``ICI Global'');

International Swaps and Derivatives Association, Inc. (Sept. 11,

2015) (``ISDA''); Institute of International Bankers and Securities

Industry and Financial Markets Association (Sept. 14, 2015) (``IIB/

SIFMA''); Japanese Bankers Association (Sept. 13, 2015) (``JBA'');

LCH.Clearnet Group Ltd. (Sept. 14, 2015) (``LCH.Clearnet''); Managed

Funds Association (Sept. 14, 2015) (``MFA''); PensionsEurope (Sept.

14, 2015) (``PensionsEurope''); Asset Management Group of the

Securities Industry and Financial Markets Association (Sept. 14,

2015) (``SIFMA AMG''); and Vanguard (Sept. 14, 2015) (``Vanguard'').

The comment file is available at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1600.

\11\ The Final Rule is codified at 17 CFR 23.160.

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B. Key Considerations in the Cross-Border Application of the Margin

Regulations

The overarching objective of the cross-border margin framework is

to further the congressional mandate to ensure the safety and soundness

of CSEs in order to offset the greater risk to CSEs and the financial

system arising from the use of swaps that are not cleared.\12\ Margin's

primary function is to protect a CSE from counterparty default,

allowing it to absorb losses and continue to meet its obligations using

collateral provided by the defaulting counterparty.\13\ While the

requirement to post margin protects the counterparty in the event of

the CSE's default, it also functions as a risk management tool,

limiting the amount of leverage a CSE can incur by requiring that it

have adequate eligible collateral to enter into an uncleared swap. In

this way, margin serves as a first line of defense not only in

protecting the CSE but in containing the amount of risk in the

financial system as a whole, reducing the potential for contagion

arising from uncleared swaps.\14\

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\12\ See 7 U.S.C. 6s(e)(3)(A).

\13\ See Proposal, 80 FR at 41377.

\14\ Although margin and capital are, by design, complementary,

they serve equally important but different risk mitigation

functions. Unlike margin, capital is difficult to rapidly adjust in

response to changing risk exposures. Capital therefore can be viewed

as a backstop in the event that margin is insufficient to cover

losses resulting from a counterparty default. The Commission

proposed capital rules in 2011. See Capital Requirements for Swap

Dealers and Major Swap Participants, 76 FR 27802 (May 12, 2011)

(``Proposed Capital Rule''). The Commission intends to repropose

capital rules later this year.

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The Commission recognizes that, to achieve the goals of the Dodd-

Frank Act, its cross-border framework must take into account the global

state of the swap market. The nature of modern financial markets means

that risk is not static or contained by geographic boundaries. Market

participants engage in swaps on a 24-hour basis in global markets, and

many financial entities operate through a complex web of branches,

subsidiaries, and affiliates that are scattered across the globe.\15\

These branches and affiliated entities are highly interdependent,

sharing not only information technology and operational support but

risk management, treasury, and custodial functions. Risks from a swap

entered into by an affiliated entity in one jurisdiction may be

transferred to another affiliate in a different jurisdiction through

inter-affiliate transactions. As part of their risk management

practices, swap dealers also commonly lay off the risk of client-facing

swaps in the interdealer market, which, as a result of consolidation

among global financial institutions, has become concentrated among a

relatively small number of dealers.\16\ These developments, along with

others, have led to a highly interconnected global swap market, where

risks originating in one jurisdiction and entity are easily transferred

to other jurisdictions and entities, increasing the possibility of

cascading defaults.

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\15\ The largest U.S. banks have somewhere between 2,000 to

3,000 affiliated global entities, hundreds of which are based in the

Cayman Islands. Data from the National Information Center (NIC), a

repository of financial data and institutional characteristics of

banks and other entities regulated by the Federal Reserve, show the

increasing complexity of U.S. banks' foreign operations. See NIC,

available at http://www.ffiec.gov/nicpubweb/nicweb/nichome.aspx. For

instance, in 1990, there were 1,300 foreign nonbank subsidiaries in

the database; at the end of 2014, there were more than 6,000.

Foreign ownership is also highly concentrated in a few large firms:

Goldman Sachs and Morgan Stanley own more than 2,000 foreign nonbank

subsidiaries and, together with General Electric, own 63 percent of

all foreign bank subsidiaries. Citigroup, JPMorgan Chase, and Bank

of America account for 75 percent of all foreign branches.

\16\ According to the Quarterly Report on Bank Trading and

Derivatives Activities issued by the Office of the Comptroller of

the Currency (OCC) for the second quarter of 2015, the notional

value of derivative contracts held by insured U.S. commercial banks

and savings associations was $197.9 trillion. See Office of the

Comptroller of the Currency, Quarterly Report on Bank Trading and

Derivatives Activities Second Quarter 2015, 1 (2015), available at

http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq215.pdf. At the same time, four large commercial banks

with the most derivatives activity--Goldman Sachs, JPMorgan Chase

Bank NA, Citibank, and Bank of America NA--held 91.1% of the

notional amount of these derivatives contracts. Id. at 11, 16.

Contracts for swaps specifically accounted for $117.5 trillion of

the $197.9 trillion total notional. Id. at 16.

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As the 2008 financial crisis illustrated, the global nature of the

swap market heightens the potential that risks assumed by a firm

overseas stemming from its uncleared swaps can be transmitted across

national borders to cause or contribute to substantial losses to U.S.

persons and threaten the stability of the entire U.S. financial system.

Complex financial and operational relationships among domestic and

international affiliates, including guarantees from U.S. entities at

entities like American International Group (AIG) and Lehman Brothers

Holding Inc., demonstrated how the transfer of risk across

multinational affiliated entities, including risk associated with

swaps, is not always transparent and can be difficult to fully assess.

More recent events, including major losses from J.P. Morgan Chase &

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Co.'s ``London Whale'' or the near failure of FCXM Inc. following

trading losses at its London and Singapore affiliates, illustrate the

continued potential for cross-border activities to have a significant

impact on U.S. entities and markets.

The global nature of the swap market, coupled with the

interconnectedness of market participants, also necessitate that the

Commission recognize the supervisory interests of foreign regulatory

authorities and consider the impact of its choices on market efficiency

and competition, which are vital to a well-functioning global swap

market.\17\ Foreign jurisdictions are at various stages of implementing

margin reforms. To the extent that other jurisdictions adopt

requirements with different coverage or timelines, the Commission's

margin requirements may lead to competitive burdens for U.S. entities

and deter non-U.S. persons from transacting with U.S. CSEs and their

affiliates overseas. The Commission's substituted compliance regime--a

central element of the Final Rule--is intended to address these

concerns without compromising the congressional mandate to protect the

safety and soundness of CSEs and the stability of the U.S. financial

system.

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\17\ In determining the extent to which the Dodd-Frank swap

provisions apply to activities overseas, the Commission strives to

protect U.S. interests, as determined by Congress in Title VII, and

minimize conflicts with the laws of other jurisdictions, consistent

with principles of international comity. See Guidance, 78 FR at

45300-01 (referencing the Restatement (Third) of Foreign Relations

Law of the United States).

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Substituted compliance has long been a central element of the

Commission's cross-border policy.\18\ It is an approach that recognizes

that market participants in a globalized swap market are subject to

multiple regulators and potentially face duplicative or conflicting

regulations. Under the Final Rule's substituted compliance regime, the

Commission would, under certain circumstances, allow a CSE to satisfy

the Commission's margin requirements by instead complying with the

margin requirements in the relevant foreign jurisdiction. Substituted

compliance helps preserve the benefits of an integrated, global swap

market by reducing the degree to which market participants will be

subject to multiple sets of regulations. Further, substituted

compliance encourages collaboration and coordination among U.S. and

foreign regulators in establishing robust regulatory standards for the

global swap market.

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\18\ For example, under part 30 of the Commission's regulations,

if the Commission determines that the foreign regulatory regime

would offer comparable protection to U.S. customers transacting in

foreign futures and options and there is an appropriate information-

sharing arrangement between the home supervisor and the Commission,

the Commission has permitted foreign brokers to comply with their

home regulations (in lieu of the applicable Commission regulations),

subject to appropriate conditions. See, e.g., Foreign Futures and

Options Transactions, 67 FR 30785 (May 8, 2002); Foreign Futures and

Options Transactions, 71 FR 6759 (Feb. 9, 2006).

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The Commission is mindful of the challenges involved in

implementing a substituted compliance framework for margin. If

implemented properly, substituted compliance has the potential to

enhance market efficiency and liquidity and foster global coordination

of margin requirements without compromising the safety and soundness of

CSEs and the U.S. financial system. However, if substituted compliance

were extended to foreign jurisdictions that do not have adequate

oversight or protections with regard to uncleared swaps, the

effectiveness of the Commission's margin requirements could be

undermined, importing additional risk into the financial system. The

Commission therefore believes that close coordination with its foreign

counterparts is essential to ensuring that the benefits of substituted

compliance are achieved.

Consistent with the congressional mandate to coordinate rules ``to

the maximum extent practicable,'' \19\ in developing the Final Rule,

Commission staff worked closely with staff of the Prudential Regulators

to align the Final Rule with the cross-border framework in the

Prudential Regulators' Final Margin Rule.\20\ Aligning with the

Prudential Regulators' cross-border margin rule is particularly

important given the composition of the global swap market.\21\

Currently, approximately 106 swap dealers and major swap participants

are provisionally registered with the Commission. Of those entities, an

estimated 54 are CSEs subject to the Commission's margin rules, with

the remaining 52 entities falling within the scope of the Prudential

Regulators' margin rules. Of the 54 CSEs subject to the Commission's

margin requirements, approximately 33 CSEs are affiliated with a

prudentially-regulated swap entity. Therefore, substantial differences

between the Commission's and Prudential Regulators' cross-border

regulations could lead to competitive disparities between affiliates

within the same corporate structure, leading to market inefficiencies

and incentives to restructure their businesses in order to avoid the

more stringent cross-border margin framework.

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\19\ See 7 U.S.C. 6s(e)(3)(D)(ii).

\20\ See Prudential Regulators' Final Margin Rule, 80 FR 74840.

The cross-border provision is section __.9 of the Prudential

Regulators' Final Margin Rule and is substantially similar to the

Commission's Final Rule.

\21\ The Securities and Exchange Commission (``SEC'') has not

yet finalized similar rules imposing margin requirements for

security-based swap dealers and major security-based swap

participants. The SEC proposed its margin rule in October 2012. See

Capital, Margin, and Segregation Requirements for Security-Based

Swap Dealers and Major Security-Based Swap Participants and Capital

Requirements for Broker-Dealers, 77 FR 70214 (Nov. 23, 2012).

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In granting the Commission new authority over swaps under the Dodd-

Frank Act, Congress also called for coordination and cooperation with

foreign regulatory authorities.\22\ Consistent with that mandate, and

building on international efforts to develop a global margin

framework,\23\ the Commission closely consulted with its foreign

counterparts in developing the Final Rule. As other jurisdictions

finalize their margin rules and the Commission implements its cross-

border margin framework, the Commission is committed to continuing to

coordinate with foreign regulators, with a view toward mitigating any

conflicting or otherwise substantially divergent margin requirements

for uncleared swaps across jurisdictions.

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\22\ 15 U.S.C. 8325(a) (added by section 752 of the Dodd-Frank

Act).

\23\ In October 2011, the Basel Committee on Banking Supervision

(``BCBS'') and the International Organization of Securities

Commissions (``IOSCO''), in consultation with the Committee on

Payment and Settlement Systems (``CPSS'') and the Committee on

Global Financial Systems (``CGFS''), formed a Working Group on

Margining Requirements (``WGMR'') to develop international standards

for margin requirements for uncleared swaps. Representatives of 26

regulatory authorities participated, including the Commission. In

September 2013, the WGMR published a final report articulating eight

key principles for non-cleared derivatives margin rules. These

principles represent the minimum standards approved by BCBS and

IOSCO and their recommendations to the regulatory authorities in

member jurisdictions. See BCBS/IOSCO, Margin requirements for non-

centrally cleared derivatives (updated March 2015) (``BCBS/IOSCO

framework''), available at http://www.bis.org/bcbs/publ/d317.pdf.

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II. The Final Rule

The Commission is adopting rules regarding how the Commission's

margin requirements will apply to cross-border uncleared swaps. Broadly

speaking, the final cross-border framework is designed to address the

risks to a CSE, as an entity, associated with its uncleared swaps,

consistent with CEA section 2(i) \24\ and the statutory objectives of

the margin requirements. As discussed above, section 4s(e) was enacted

to address the risks to CSEs and to the U.S. financial system arising

from uncleared swaps. The source of risk to a CSE is not confined to

its uncleared

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swaps with U.S. counterparties or to swaps transacted within the United

States. Risk arising from uncleared swaps involving non-U.S.

counterparties can potentially have a substantial adverse effect on a

CSE and therefore the stability of the U.S. financial system.

Nevertheless, certain categories of uncleared swaps will be eligible

for substituted compliance or the Exclusion based on the Commission's

consideration of comity principles and the impact of the Final Rule on

market efficiency and competition.

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\24\ See 7 U.S.C. 2(i).

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The sections that follow summarize, as appropriate, the approach

taken in the proposed rule, the comments received in response, and the

resulting Final Rule. Section A discusses certain key definitions

(``U.S. person,'' ``guarantee,'' and ``Foreign Consolidated

Subsidiary'' or ``FCS'') in the Final Rule, which inform how the

Commission's margin requirements apply to market participants in the

cross-border context. Section B describes the cross-border application

of the Commission's margin requirements, including the circumstances

under which substituted compliance and the limited Exclusion are

available and the application of two special provisions designed to

accommodate swap activities in jurisdictions that do not have a legal

framework to support custodial arrangements and netting in compliance

with the Final Margin Rule (``non-segregation jurisdictions'' \25\ and

``non-netting jurisdictions,'' respectively).\26\ Section C describes

the Commission's framework for issuing comparability determinations.

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\25\ As used in this release, a ``non-segregation jurisdiction''

is a jurisdiction where inherent limitations in the legal or

operational infrastructure of the foreign jurisdiction make it

impracticable for the CSE and its counterparty to post initial

margin pursuant to custodial arrangements that comply with the Final

Margin Rule, as further described in section II.B.4.b.

\26\ As used in this release, a ``non-netting jurisdiction'' is

a jurisdiction in which a CSE cannot conclude, with a well-founded

basis, that the netting agreement with a counterparty in that

foreign jurisdiction meets the definition of an ``eligible master

netting agreement'' set forth in the Final Margin Rule, as described

in section II.B.5.b.

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As a preliminary matter, the Commission notes that several

commenters requested Commission action outside the scope of the Final

Rule, including modifications to the substantive margin requirements

\27\ or the Guidance.\28\ The Commission notes that concerns regarding

the general nature and application of the initial and variation margin

requirements were addressed in the Final Margin Rule. Notably, the

Final Margin Rule included substantial modifications from the Proposed

Margin Rule that further aligned the Commission's margin requirements

with the BCBS-IOSCO framework, which should further reduce the

potential for conflicts with the margin requirements of foreign

jurisdictions.\29\ With respect to the Guidance, the Commission

reiterates its intention to periodically review its cross-border policy

in light of future developments, including its experience following

adoption of the Final Rule.\30\

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\27\ See, e.g., ACLI at 2-3 (Commission should defer to

International Standards with respect to acceptable forms of

collateral for margin); FMS-WM at 1-2 (legacy portfolio entity

backed by full faith and credit of sovereign government should be

considered a ``sovereign entity'' within scope of Commission's

margin requirements); ISDA at 14-15 (inter-affiliate swaps should be

exempt from initial margin requirements and accounting standards to

determine consolidation should be applied throughout margin rules);

JBA at 6 (Commission should work with foreign counterparts to

harmonize aspects of its margin rules, including treatment of

``legacy trades,'' inter-affiliate trades, and forms of eligible

collateral); LCH.Clearnet at 4 (differences in approach to margin

requirements between cleared and uncleared swaps should promote

central clearing).

\28\ See, e.g., AFR at 2 (adopting cross-border approach to

margin alone would create ``serious problems''); AIMA/IA at 4

(Commission should amend Guidance to include U.S. person definition

in the proposed rule); Better Markets at 6 (adopting cross-border

approach to margin alone would be ``a disservice to the

comprehensive existing Guidance;'' should instead make ``targeted,

limited changes'' to Guidance); ICI Global at 7-8 (one U.S. person

definition should apply consistently with respect to cross-border

application of all swap requirements); IIB/SIFMA at 17-19 (proposed

U.S. person and guarantee definitions should replace corresponding

interpretations in Guidance); ISDA at 12 (same); JBA at 11-12

(same); SIFMA AMG at 4, 9-13 (same); Vanguard at 5 (same).

\29\ For example, the Final Margin Rule raised the material

swaps exposure level from $3 billion to the BCBS-IOSCO standard of

$8 billion, which reduces the number of entities that must collect

and post initial margin. See Final Margin Rule, 81 FR at 644. In

addition, the definition of uncleared swaps was broadened to include

DCOs that are not registered with the Commission but pursuant to

Commission orders are permitted to clear for U.S. persons. See id.

at 638.

\30\ See Guidance, 78 FR at 45297. See also United States v.

Edge Broadcasting Co., 509 U.S. 418, 434 (1993) (``[A]n agency does

not have to make progress on every front before it can make progress

on any front.''). See also Personal Watercraft Indus. Ass'n v. Dep't

of Commerce, 48 F.3d 540, 544 (D.C. Cir. 1995).

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Commenters also requested that the Commission delay the cross-

border application of its margin rules until after it has made

comparability determinations.\31\ Although the Commission declines to

establish an open-ended delay in applying its margin rules, it remains

committed to coordinating with foreign regulators to implement its

cross-border margin framework in a workable manner.

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\31\ See, e.g., ABA/ABASA at 3 (``sufficient time'' for foreign

jurisdictions to adopt margin rules); AIMA/IA at 3 (``sufficient

time'' to reach agreement with foreign counterparts); ISDA at 16-17

(12 months after margin rules are finalized in U.S., EU, and Japan,

or two-year ``transitional comparability determination,'' providing

substituted compliance for all foreign jurisdictions that adopt

rules based on BCBS-IOSCO framework, while Commission undertakes

comparability analysis); JBA at 3, 4 (at least 18 months after

margin rules are finalized in the U.S., EU, and Japan);

PensionsEurope at 3 (12-18 months); SIFMA AMG at 4, 14-15 (at least

18 months).

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A. Key Definitions

The extent to which substituted compliance and the Exclusion are

available depends on whether the relevant swap involves a U.S. person,

a guarantee by a U.S. person, or a ``Foreign Consolidated Subsidiary''

(or ``FCS''). The Final Rule adopts definitions of ``U.S. person,''

``guarantee,'' and ``Foreign Consolidated Subsidiary'' solely for

purposes of the margin rules. These definitions are discussed below.

1. U.S. Person

Under the Final Rule, the term ``U.S. person'' is defined to

include individuals or entities whose activities have a significant

nexus to the U.S. market as a result of their being domiciled or

organized in the United States or by virtue of the strength of their

connection to the U.S. markets, even if they are domiciled or organized

outside the United States. As discussed in section II.B.2.b.i. below,

U.S. CSEs \32\ are generally subject to the margin rules with only

partial substituted compliance and are not eligible for the Exclusion.

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\32\ See 17 CFR 23.160(a)(8) (defining ``U.S. CSE'' as a CSE

that is a ``U.S. person,'' as defined in the Final Rule). See also

17 CFR 23.160(a)(4) (defining ``non-U.S. CSE'' as a CSE that is not

a U.S. person).

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a. Proposed Rule

In the proposed rule, the term ``U.S. person'' was defined to mean

the following:

Any natural person who is a resident of the United States

(proposed Sec. 23.160(a)(10)(i));

Any estate of a decedent who was a resident of the United

States at the time of death (proposed Sec. 23.160(a)(10)(ii));

Any corporation, partnership, limited liability company,

business or other trust, association, joint-stock company, fund or any

form of entity similar to any of the foregoing (other than an entity as

described in paragraph (a)(10)(iv) or (v) of proposed Sec. 23.160) (a

legal entity), in each case that is organized or incorporated under the

laws of the United States or that has its principal place of business

in the United States, including any branch of

[[Page 34822]]

the legal entity (proposed Sec. 23.160(a)(10)(iii));

Any pension plan for the employees, officers or principals

of a legal entity as described in paragraph (a)(10)(iii) of proposed

Sec. 23.160, unless the pension plan is primarily for foreign

employees of such an entity (proposed Sec. 23.160(a)(10)(iv));

Any trust governed by the laws of a state or other

jurisdiction in the United States, if a court within the United States

is able to exercise primary supervision over the administration of the

trust (proposed Sec. 23.160(a)(10)(v));

Any legal entity (other than a limited liability company,

limited liability partnership or similar entity where all of the owners

of the entity have limited liability) owned by one or more persons

described in paragraphs (a)(10)(i) through (v) of proposed Sec. 23.160

who bear(s) unlimited responsibility for the obligations and

liabilities of the legal entity, including any branch of the legal

entity (proposed Sec. 23.160(a)(10)(vi)); and

Any individual account or joint account (discretionary or

not) where the beneficial owner (or one of the beneficial owners in the

case of a joint account) is a person described in paragraphs (a)(10)(i)

through (vi) of proposed Sec. 23.160 (proposed Sec.

23.160(a)(10)(vii)).\33\

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\33\ See proposed 17 CFR 23.160(a)(10). See also proposed 17 CFR

23.160(a)(5) (defining ``non-U.S. person'' as any person that is not

a ``U.S. person'').

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The Commission explained that, as indicated in paragraphs (iii) and

(vi) of the proposed rule, a legal entity's status as a U.S. person

would be determined at the entity level and would therefore include a

foreign branch of a U.S. person.\34\ An affiliate or subsidiary of a

U.S. person that is organized or incorporated outside the United

States, however, would not be deemed a ``U.S. person'' solely by virtue

of its affiliation with the U.S. person.\35\ The Commission also stated

that a swap counterparty should generally be permitted to reasonably

rely on its counterparty's written representation with regard to its

status as a U.S. person.\36\

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\34\ See Proposal, 80 FR at 41383 (stating that the definition

includes any foreign operations that are part of the U.S. legal

person, regardless of their location); proposed 17 CFR 23.160

(a)(10)(iii), (vi) (defining such U.S. persons to include ``any

branch of the legal entity'').

\35\ See Proposal, 80 FR at 41383 (explaining that the status of

a legal person as a U.S. person would not affect whether a

separately incorporated or organized legal person in the affiliated

corporate group is a U.S. person).

\36\ See id. (recognizing that the information necessary to

accurately assess a counterparty's U.S. person status may be

available only through overly burdensome due diligence).

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The proposed rule was generally consistent with the U.S. person

interpretation set forth in the Guidance, with certain exceptions.\37\

Notably, the proposed rule did not define ``U.S. person'' to include a

commodity pool, pooled account, investment fund, or other collective

investment vehicle that is majority-owned by one or more U.S. persons

(the ``U.S. majority-owned fund prong'').\38\ The proposed rule also

did not include a catchall provision, thereby limiting the definition

of ``U.S. person'' for purposes of the margin rule to persons

enumerated in the rule.\39\ Finally, paragraph (vi) of the proposed

rule (the ``unlimited U.S. responsibility prong'') represented a

modified version of a similar concept from the Guidance, which

interprets ``U.S. person'' to include a legal entity ``directly or

indirectly majority-owned'' by one or more U.S. person(s) that bear

unlimited responsibility for the legal entity's liabilities and

obligations.\40\

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\37\ See Proposal, 80 FR at 41382-84. See also Guidance, 78 FR

at 45308-17 (setting forth the interpretation of ``U.S. person'' for

purposes of the Guidance).

\38\ See Proposal, 80 FR at 41383. See also Guidance, 78 FR

45313-14 (discussing the U.S. majority-ownership prong for purposes

of the Guidance). The Guidance interpreted ``majority-owned'' in

this context to mean the beneficial ownership of more than 50

percent of the equity or voting interests in the collective

investment vehicle. See id. at 45314.

\39\ See Proposal, 80 FR at 41383. See also Guidance, 78 FR at

45316 (discussing the inclusion of the prefatory phrase ``include,

but not be limited to'' in the interpretation of ``U.S. person'' in

the Guidance).

\40\ See Proposal, 80 FR at 41383. See also Guidance, 78 FR at

45312-13 (discussing the unlimited U.S. responsibility prong for

purposes of the Guidance).

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The Commission requested comment on all aspects of the proposed

definition of ``U.S person,'' including whether the definition should

include a U.S. majority-owned fund prong or an unlimited U.S.

responsibility prong and whether it should be identical to the U.S.

person definition adopted by the SEC.\41\

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\41\ See Proposal, 80 FR at 41384. See also 17 CFR 240.3a71-

3(a)(4) (setting forth the definition of ``U.S. person'' adopted by

the SEC for purposes of security-based swap regulation).

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b. Comments

In general, commenters raised few objections to the proposed ``U.S.

person'' definition. Nearly all commenters supported the absence of a

U.S. majority-owned fund prong,\42\ and several expressly supported the

absence of a catchall provision.\43\ With respect to the U.S. majority-

owned funds prong, commenters argued that U.S. ownership alone is not

indicative of whether a fund's activities have a direct and significant

effect on the U.S. financial system \44\ and that identifying and

tracking a fund's beneficial ownership may pose a significant challenge

in certain circumstances.\45\ Commenters added that characterizing such

U.S. majority-owned funds as U.S. persons may lead to duplicative

margin requirements because such funds will likely also be subject to

foreign regulation.\46\

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\42\ See e.g., AIMA/IA at 3-4; FSR at 2, 8; IATP at 4; IIB/SIFMA

at 18; ISDA at 12; JBA at 11; MFA at 3, 5-6; SIFMA AMG at 10,

Vanguard at 5.

\43\ See e.g., IIB/SIFMA at 17; ISDA at 12 (the absence the

prefatory phrase ``includes, but is not limited to'' would

``increase legal certainty''); SIFMA AMG at 10-11.

\44\ See e.g., AIMA/IA at 3; FSR at 8; IATP at 4; IIB/SIFMA at

18 (fund owners are not direct counterparties to swap and their risk

of loss is limited to extent of their investment in the fund); MFA

at 6.

\45\ See e.g., AIMA/IA at 3-4 (highlighting challenges presented

by nominee accounts); IATP at 4 (ownership can be complex and

variable over the life of a fund); IIB/SIFMA at 18 (highlighting

challenges associated with funds formed before adoption of

Guidance); SIFMA AMG at 10. But see MFA at 5-6 (funds organized or

having a principal place of business in the United States are

properly included in the U.S. person definition).

\46\ See AIMA/IA at 4 (``comparable foreign rules'' will apply

to limit the likelihood and impact of a counterparty default); FSR

at 8 (neither SEC nor EU regulators have proposed exercising

jurisdiction over an entity on the basis of majority control); ISDA

at 12 (neither BCBS-IOSCO framework nor proposed EU rules impose

rules on funds based on jurisdiction of its owners).

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A few commenters, however, requested changes regarding the

unlimited U.S. responsibility prong. ISDA and JBA recommended that,

consistent with the Guidance, the Commission require that the U.S.

person(s) bearing unlimited responsibility for the obligations and

liabilities of the legal entity have a majority ownership stake in the

entity. ISDA argued broadly that, to avoid confusion and regulatory

overlap, legal entities that have multiple owners with unlimited

liability for the obligations and liabilities of the legal entity

should only be subject to the jurisdiction of the majority owner.\47\

JBA argued that the definition should be consistent with the Guidance

in order to avoid the possibility that the Commission's margin

requirements would apply to a ``broader scope of U.S. persons relative

to other swap regulations.'' \48\ IIB/SIFMA requested that the

unlimited U.S. responsibility prong be removed altogether, arguing that

unlimited responsibility is ``largely equivalent'' to a guarantee and

should therefore be afforded the same treatment.\49\

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\47\ See ISDA at 12.

\48\ See JBA at 11-12.

\49\ See IIB/SIFMA at 17-18 (while guarantor may have legal

defenses to enforcement of guarantee, both U.S. guarantee and

unlimited U.S. responsibility prong create risk to U.S. persons only

to the extent that legal entity incurs losses and fails to perform

obligations).

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[[Page 34823]]

Commenters also made certain other recommendations to further

conform the U.S. person definition to the interpretation of ``U.S.

person'' in the Guidance.\50\ ICI Global, SIFMA AMG, and Vanguard

requested that the Commission confirm that, as indicated in the

Guidance, a pool, fund or other collective investment vehicle that is

publicly offered only to non-U.S. persons and not offered to U.S.

persons would not fall within the scope of the U.S. person

definition.\51\ SIFMA AMG also added that language in paragraphs (iii)

and (vi) specifying that a legal entity deemed a U.S. person would

include ``any branch of the legal entity'' was unnecessarily

confusing.\52\

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\50\ As indicated above, several commenters recommended

generally that the Commission establish a uniform definition of

``U.S. person'' that would apply both in the context of the cross-

border application of the margin rules and with respect to the other

swaps regulatory topics covered by the Guidance. See supra note 28.

\51\ See ICI Global at 5-7 (clarification is necessary to avoid

imposing Dodd-Frank Act swap provisions on entities that only have

``nominal nexus'' to United States); SIFMA AMG at 10-12

(reclassifying such funds as U.S. persons solely for purposes of

margin rule would be extremely complicated and burdensome for asset

managers and their clients); Vanguard at 5. See also Guidance, 78 FR

at 45314 (providing that a collective investment vehicle that is

publicly offered only to non-U.S. persons and not offered to U.S.

persons generally would not fall within any of the prongs of the

``U.S. person'' interpretation in the Guidance).

\52\ SIFMA AMG at 12 (such language, which is not present in

corresponding prongs of U.S. person interpretation in Guidance,

could ``cause confusion in terms of whether a person having any

branches in the United States needs to take into account its U.S.

person status, including in assessing the entity's principal place

of business'').

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Finally, FSR and JBA requested that, in the interest of harmonizing

margin requirements and reducing compliance costs, the Commission

should, consistent with the SEC's cross-border rules, exclude from the

U.S. person definition certain designated international

organizations.\53\ IATP argued, however, that such exclusion would be

either unnecessary or inappropriate.\54\

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\53\ See FSR at 8; JBA at 12 (while international financial

institutions ``are invested by the U.S. government, financial

institutions generally separate them from the U.S. country risk in

evaluating their credit risk in practice''). See also 17 CFR

240.3a71-3(a)(4)(iii) (defining ``U.S. person'' for purposes of the

SEC's regulation of security-based swaps to exclude the

International Monetary Fund, the International Bank for

Reconstruction and Development, the Inter-American Development Bank,

the Asian Development Bank, the African Development Bank, the United

Nations, and their agencies and pension plans, and any other similar

international organizations, their agencies and pension plans).

\54\ See IATP at 4 (intergovernmental organizations should

``voluntarily practice'' the margin requirements in order to

``realize the objectives of the [sic] intergovernmental investment

charters'').

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c. Final Rule

The Final Rule defines ``U.S. person'' as proposed, but the

Commission is providing some additional clarifications in response to

commenters. As stated in the Proposal, the definition generally follows

a traditional, territorial approach to defining a U.S. person, and the

Commission believes that this definition offers a clear, objective

basis for determining those individuals or entities that should be

identified as U.S. persons.

Under the Final Rule, a legal person's status as a U.S. person is

determined at the entity level and therefore includes any foreign

operations that are part of the legal person, regardless of their

location. Consistent with this approach, the definition includes any

foreign branch of a U.S. person.\55\ The status of a legal entity as a

U.S. person would not generally affect whether a separately

incorporated or organized legal entity in the affiliated corporate

group is a U.S. person. Therefore, an affiliate or a subsidiary of a

U.S. person that is organized or incorporated in a non-U.S.

jurisdiction would not be deemed a U.S. person solely by virtue of

being affiliated with a U.S. person.\56\

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\55\ The Commission clarifies that the inclusion of ``any branch

of the legal entity'' in sections 23.160(a)(10)(iii) and (vi) of the

Final Rule is intended to make clear that the definition includes

both foreign and U.S. branches of an entity and does not introduce

any additional criteria for determining an entity's U.S. person

status.

\56\ See also 17 CFR 23.160(a)(5) (defining ``non-U.S. person''

as any person that is not a U.S. person).

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Sections 23.160(a)(10)(i) through (v) and (vii) of the Final Rule

identify certain persons as U.S. persons by virtue of being domiciled

or organized in the United States. The Commission has traditionally

looked to where a legal entity is organized or incorporated (or, in the

case of a natural person, where he or she resides) to determine whether

it is a U.S. person.\57\ Persons domiciled or organized in the United

States are likely to have significant financial and legal relationships

in the United States and are therefore appropriately included within

the definition of ``U.S. person.''

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\57\ See, e.g., 17 CFR 4.7(a)(1)(iv) (defining ``Non-United

States person'' for purposes of part 4 of the Commission

regulations, which applies to commodity pool operators).

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Consistent with this traditional approach, section

23.160(a)(10)(iii) of the Final Rule includes persons that are

organized or incorporated outside the United States but have their

principal place of business in the United States. For purposes of this

section, the Commission interprets ``principal place of business'' to

mean the location from which the officers, partners, or managers of the

legal person primarily direct, control, and coordinate the activities

of the legal person. This interpretation is consistent with the Supreme

Court's decision in Hertz Corp. v. Friend, which described a

corporation's principal place of business, for purposes of diversity

jurisdiction, as the ``place where the corporation's high level

officers direct, control, and coordinate the corporation's

activities.'' \58\

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\58\ 559 U.S. 77, 80 (2010).

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The Commission is of the view that determining the principal place

of business of an investment fund may require consideration of

additional factors beyond those applicable to operating companies. In

the case of a fund, the senior personnel that direct, control, and

coordinate a fund's activities are generally not the named directors or

officers of the fund but rather persons employed by the fund's

investment adviser or the fund's promoter. Therefore, consistent with

the Guidance, the Commission would generally consider the principal

place of business of a fund to be in the United States if the senior

personnel responsible for either (1) the formation and promotion of the

fund or (2) the implementation of the fund's investment strategy are

located in the United States, depending on the facts and circumstances

that are relevant to determining the center of direction, control and

coordination of the fund.\59\

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\59\ See Guidance, 78 FR at 45309-12 (providing guidance on

application of the principal place of business test to funds and

other collective investment vehicles in the context of cross-border

swaps, including examples of how the Commission's approach could

apply to a consideration of whether the ``principal place of

business'' of a fund is in the United States in particular

hypothetical situations). Note that the examples included in the

Guidance are for illustrative purposes only and do not purport to

address all potential variations in the structure of collective

investment vehicles or all factors relevant to determining whether a

collective investment vehicle's principal place of business is in

the United States.

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Section 23.160(a)(10)(vi) of the Final Rule defines ``U.S. person''

to include certain legal entities owned by one or more U.S. person(s)

and for which such person(s) bear unlimited responsibility for the

obligations and liabilities of the legal entity.\60\ In such cases, the

U.S.

[[Page 34824]]

person owner(s) serve as a financial backstop for all of the legal

entity's obligations and liabilities. Creditors and counterparties

accordingly look to the U.S. person owner(s) when assessing the risk of

dealing with the entity.\61\ Because the U.S. person owner(s)'

responsibility is unlimited, the amount of equity the U.S. owner(s)

have in the legal entity would not be relevant.

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\60\ The Commission does not view the unlimited U.S.

responsibility prong as equivalent to a U.S. guarantee (as

``guarantee'' is defined in the Final Rule). As stated in the

Guidance, a guarantee does not necessarily provide for ``unlimited

responsibility for the obligations and liabilities of the guaranteed

entity'' in the same sense that the owner of an unlimited liability

corporation bears such unlimited liability. See 78 FR at 45312.

\61\ By extension, by virtue of their unlimited responsibility

for the legal entity's swap obligations, the U.S. person owner(s)

have an interest in the swap activities of the legal entity to the

same extent as if the swap activities were conducted by the U.S.

person directly.

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In line with the proposed rule, the Final Rule does not include a

U.S. majority-owned funds prong. Although the U.S. owners of such funds

may be adversely impacted in the event of a counterparty default, the

Commission believes that, on balance, the majority-ownership test

should not be included in the definition of U.S. person for purposes of

the margin rules. Non-U.S. funds with U.S. majority-ownership, even if

treated as a non-U.S. person, are excluded from the Commission's margin

rules only in limited circumstances (namely, when these funds transact

with a non-U.S. CSE that is not a consolidated subsidiary of a U.S.

entity or a U.S. branch of a non-U.S. CSE). This result, coupled with

the implementation issues raised by commenters, persuade the Commission

that including a U.S. majority-owned funds prong in the scope of the

``U.S. person'' definition would not be appropriate for purposes of the

margin rules.\62\ The Final Rule's U.S. person definition also does not

include the prefatory phrase ``includes, but is not limited to'' that

was included in the Guidance. As stated in the proposed rule, the

Commission believes that this catchall should not be included in order

to provide legal certainty regarding the application of U.S. margin

requirements to cross-border swaps.

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\62\ Such a fund may nevertheless be a U.S. person by virtue of

fitting within the scope of Sec. 23.160(a)(10)(iii) (entities

organized or having a principal place of business in the United

States). In response to commenters, the Commission further clarifies

that whether a pool, fund or other collective investment vehicle is

publicly offered only to non-U.S. persons and not offered to U.S.

persons would not be relevant in applying Sec. 23.160(a)(10)(iii).

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The Commission notes that, as discussed in the proposed rule, the

Final Rule defines ``U.S. person'' in a manner that is substantially

similar to the definition used by the SEC in the context of cross-

border regulation of security-based swaps.\63\ The Commission further

believes that any differences, such as the inclusion of an unlimited

U.S. responsibility prong, are necessary and appropriate in the context

of the cross-border application of margin requirements for uncleared

swaps, for the reasons discussed above.\64\ With respect to the

designated international organizations excluded from the SEC's U.S.

person definition, the Commission notes that a similar exclusion is

unnecessary in the context of the cross-border application of the

Commission's margin rules, given that such entities are generally

considered non-financial end users under the Final Margin Rule and are

therefore unaffected by application of the margin requirements for

uncleared swaps.\65\

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\63\ See Proposal, 80 FR at 41382 n.46 (discussing the SEC's

``U.S. person'' definition for purposes of security-based swap

regulation).

\64\ The SEC does not include the U.S. responsibility prong in

its U.S. person definition, but instead treats a legal entity where

one or more U.S. person(s) bears unlimited responsibility for the

obligations and liabilities of the legal entity as a non-U.S. person

with a guarantee. The Commission believes that, for the reasons

stated above, these entities should be included as a U.S. person

rather than being treated as a non-U.S. person with a guarantee for

purposes of the margin requirements for uncleared swaps.

\65\ Under the Final Margin Rule, the following international

organizations are expressly considered non-financial end users: (1)

The International Bank for Reconstruction and Development; (2) The

Multilateral Investment Guarantee Agency; (3) The International

Finance Corporation; (4) The Inter-American Development Bank; (5)

The Asian Development Bank; (6) The African Development Bank; (7)

The European Bank for Reconstruction and Development; (8) The

European Investment Bank; (9) The European Investment Fund; (10) The

Nordic Investment Bank; (11) The Caribbean Development Bank; (12)

The Islamic Development Bank; (13) The Council of Europe Development

Bank; and (14) Any other entity that provides financing for national

or regional development in which the U.S. government is a

shareholder or contributing member or which the Commission

determines poses comparable credit risk). See 17 CFR 23.151

(defining ``financial end user,'' ``non-financial end user,'' and

``multilateral development bank''). Under the Final Margin Rule,

CSEs are not required to exchange margin with non-financial end

users.

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2. Guarantees

Under the Final Rule, the term ``guarantee'' is defined to include

arrangements, pursuant to which one party to an uncleared swap has

rights of recourse against a guarantor, with respect to its

counterparty's obligations under the uncleared swap. As discussed in

section II.B.2.b.i. below, non-U.S. CSEs whose obligations under the

relevant swap are guaranteed by a U.S. person (``U.S. Guaranteed

CSEs'') \66\ are eligible for substituted compliance to the same extent

as U.S. CSEs and are similarly ineligible for the Exclusion.

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\66\ This release uses the term ``U.S. Guaranteed CSE'' for

convenience only. Whether a non-U.S. CSE falls within the meaning of

the term ``U.S. Guaranteed CSE'' varies on a swap-by-swap basis,

such that a non-U.S. CSE may be considered a U.S. Guaranteed CSE for

one swap and not another, depending on whether the non-U.S. CSE's

obligations under such swap are guaranteed by a U.S. person.

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a. Proposed Rule

The proposed rule defined the term ``guarantee'' as an arrangement

pursuant to which one party to a swap with a non-U.S. counterparty has

rights of recourse against a U.S. person, with respect to the non-U.S.

counterparty's obligations under the swap. The proposed rule defined

``rights of recourse'' as a conditional or unconditional legally

enforceable right to receive or otherwise collect payment, in whole or

in part. An arrangement would constitute a ``guarantee'' regardless of

whether the rights of recourse were conditioned upon the non-U.S.

counterparty's insolvency or failure to meet its obligations under the

relevant swap or whether the counterparty seeking to enforce the

guarantee is required to make a demand for payment or performance from

the non-U.S. counterparty before proceeding against the U.S. guarantor.

The Commission requested comment on all aspects of its proposed

definition of ``guarantee,'' including whether it would be appropriate

to distinguish guarantee arrangements with a legally enforceable right

of recourse from those without direct recourse.\67\

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\67\ See Proposal, 80 FR at 41385.

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b. Comments

Most commenters supported the proposed definition of ``guarantee.''

\68\ Commenters generally preferred it to the broader interpretation of

``guarantee'' in the Guidance, which includes other types of financial

arrangements and support (e.g., keepwell agreements and liquidity

puts),\69\ and agreed that it would promote legal certainty and lower

compliance costs as a result.\70\ IIB/SIFMA further argued the proposed

definition is appropriate in the margin context and consistent with CEA

section 2(i) because, absent such a legal relationship to a U.S.

person, a non-U.S. person would not have a sufficient connection with

activities in U.S. commerce to warrant the application of

[[Page 34825]]

U.S. margin rules.\71\ Commenters expressed concern, however, that

multiple ``guarantee'' definitions could lead to confusion and

recommended that the Commission apply the proposed ``guarantee''

definition throughout its cross-border policy.\72\

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\68\ See FSR at 2, 9; IATP at 5; IIB/SIFMA at 18-19; ISDA at 12;

JBA at 12; SIFMA AMG at 4, 13.

\69\ See IIB/SIFMA at 18-19; ISDA at 12; JBA at 12; SIFMA AMG at

13.

\70\ See IIB/SIFMA at 18-19; ISDA at 12 (interpretation of

``guarantee'' in Guidance requires facts-and-circumstances analysis

to determine whether arrangement supports a party's ability to pay

or perform under swap); JBA at 12; SIFMA AMG at 13 (expressing

approval that the proposed definition aligns with guarantee

definition adopted by SEC).

\71\ See IIB/SIFMA at 18-19. See also FSR at 9 (``transaction-

level'' swap risk would not transfer back to United States absent

right of recourse against a U.S. person and ``entity-level'' risk

would be captured by other regulatory requirements, such as capital

rules).

\72\ See ISDA at 12; JBA at 12; SIFMA AMG at 13.

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AFR and Better Markets opposed the proposed ``guarantee''

definition.\73\ Both expressed a preference for the broader

interpretation of ``guarantee'' in the Guidance and, like other

commenters, recommended that the term have one consistent meaning.\74\

AFR argued that both implicit guarantees, such as when a parent entity

faces reputational incentives to provide financial support for a

subsidiary, and other formal agreements that obligate a U.S. person to

provide financial support, create a direct and significant nexus to the

U.S. financial system and should be included within the scope of the

term ``guarantee.'' \75\ Accordingly, the proposed definition of

``guarantee'' may not fully capture the risk to the U.S. financial

markets.\76\ AFR suggested that the policy objective of increasing the

availability of substituted compliance in the margin context would be

better achieved by adopting the broad interpretation of ``guarantee''

in the Guidance and instead limiting the availability of substituted

compliance with respect to swaps involving an ``explicit recourse

guarantee.'' \77\

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\73\ AFR at 3, 5-7; Better Markets at 4.

\74\ See AFR at 3 (adopting different definition solely for

purposes of margin rules would not only complicate overall set of

cross-border rules, but establish an ``extremely poor precedent''

for narrowing guarantee concept in applying rest of Guidance);

Better Markets at 4 (proposed definition is ``less robust'' than

interpretation of guarantee in Guidance and should not be different

in margin context).

\75\ See AFR at 6.

\76\ See id.

\77\ See id. at 5-6.

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c. Final Rule

The Final Rule defines ``guarantee'' for purposes of the cross-

border application of the Commission's margin rules to mean an

arrangement pursuant to which one party to an uncleared swap has rights

of recourse against a guarantor, with respect to its counterparty's

obligations under the uncleared swap.\78\ For these purposes, a party

to an uncleared swap has rights of recourse against a guarantor if the

party has a conditional or unconditional legally enforceable right to

receive or otherwise collect, in whole or in part, payments from the

guarantor with respect to its counterparty's obligations under the

uncleared swap. A counterparty has a right of recourse against a

guarantor even if the right of recourse is conditioned upon its

counterparty's insolvency or failure to meet its obligations under the

swap, and regardless of whether the counterparty seeking to enforce the

guarantee is first required to make a demand for payment or performance

from its counterparty before proceeding against the guarantor. Further,

the term ``guarantee'' applies equally regardless of whether the U.S.

guarantor is affiliated with either counterparty or is an unaffiliated

third party. In addition, the terms of the guarantee need not

necessarily be included within the swap documentation or even otherwise

reduced to writing, so long as a party to the swap has legally

enforceable rights of recourse under the laws of the relevant

jurisdiction.

---------------------------------------------------------------------------

\78\ See 17 CFR 23.160(a)(2).

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The Final Rule's definition of guarantee is generally consistent

with the proposed rule's definition of guarantee, but reflects certain

changes that are intended to more closely align it with the definition

included in the Prudential Regulators' Final Margin Rule.\79\ Language

has been added to the Final Rule to address the concerns of the

Commission and Prudential Regulators that swaps could be structured in

a manner that would avoid application of the margin requirements to

swaps that are guaranteed by a U.S. person.\80\ Under this additional

language, the term ``guarantee'' also encompasses any arrangement

pursuant to which the guarantor itself has a conditional or

unconditional legally enforceable right to receive or otherwise

collect, in whole or in part, payments from any other guarantor with

respect to the counterparty's obligations under the uncleared swap.

Under the Final Rule, such arrangement will be deemed a guarantee of

the counterparty's obligations under the uncleared swap by the other

guarantor.

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\79\ The Final Rule also includes certain technical edits that

would not affect the substance of the rule as compared to the

proposed rule.

\80\ Based on this change to the definition of ``guarantee,''

the Final Rule differs from the proposed rule in that it treats

certain non-U.S. persons as if they were U.S. persons.

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To illustrate, consider a swap between a non-U.S. CSE (``Party A'')

and a non-U.S. person (``Party B''). Party B's obligations under the

swap are guaranteed by a non-U.S. affiliate (``Party C''), who in turn

has a guarantee from its U.S. CSE parent entity on Party C's swap

obligations (``Parent D''). The Final Rule would deem a guarantee to

exist between Party B and Parent D with respect to Party B's

obligations under the swap with Party A.\81\

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\81\ This example is included for illustrative purposes only,

and is not intended to cover all examples of swaps that could be

affected by changes in the Final Rules.

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The Commission is cognizant that many other financial arrangements

or support, other than a recourse guarantee as defined in the Final

Rule, may be provided by a U.S. person to a non-U.S. CSE. The

Commission acknowledges that these other financial arrangements or

support may transfer risk directly back to the U.S. financial system,

with possible significant adverse effects, in a manner similar to an

arrangement that is covered by the definition of a ``guarantee'' in the

Final Rule. However, the Commission believes that, in the context of

the Final Rule, non-U.S. CSEs benefitting from such other forms of U.S.

financial support will likely meet the definition of an FCS, a concept

included in the final margin rules adopted by the Prudential

Regulators, and thereby be adequately covered by the Commission's

margin requirements. In this way, the Commission believes that the

Final Rule achieves the dual goals of protecting the U.S. markets while

promoting a workable cross-border margin framework that closely tracks

the cross-border application of the Prudential Regulators' Final Margin

Rule.\82\

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\82\ The Commission has determined that using the term

``explicit recourse guarantee'' in lieu of the broader ``guarantee''

would, in light of the Prudential Regulators' use of the comparable

term ``guarantee,'' likely only cause confusion without making any

substantive difference with respect to the cross-border application

of the Commission's margin requirements.

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3. Foreign Consolidated Subsidiary (``FCS'')

Under the Final Rule, the term ``Foreign Consolidated Subsidiary''

identifies non-U.S. CSEs that are consolidated for accounting purposes

with an ultimate parent entity that is a U.S. person (a ``U.S. ultimate

parent entity''). As further discussed in section II.B.2.b.ii. below,

substituted compliance would be broadly available to an FCS to the same

extent as any other non-U.S. CSE, but such an FCS would not be eligible

for the Exclusion.

a. Proposed Rule

The proposed rule defined a ``Foreign Consolidated Subsidiary'' as

a non-U.S. CSE in which an ``ultimate parent entity'' \83\ that is a

U.S. person has a

[[Page 34826]]

controlling interest, in accordance with U.S. generally accepted

accounting principles (``U.S. GAAP'') such that the U.S. ultimate

parent entity includes the non-U.S. CSE's operating results, financial

position and statement of cash flows in its consolidated financial

statements, in accordance with U.S. GAAP.\84\ The Commission explained

that the fact that an entity is included in the consolidated financial

statements of another entity is an indication of potential risk to the

other entity that offers a clear and objective standard for the

application of margin requirements. The Commission further explained

that, as a result of the FCS' direct connection to, and the possible

negative impact of its swap activities on, its U.S. ultimate parent

entity and the U.S. financial system, an FCS raises a more substantial

supervisory concern in the United States relative to other non-U.S.

CSEs.

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\83\ See proposed 17 CFR 23.160(a)(6) (defining ``ultimate

parent entity'' as the parent entity in a consolidated group in

which none of the other entities in the consolidated group has a

controlling interest, in accordance with U.S. GAAP).

\84\ Under U.S. GAAP, consolidated financial statements report

the financial position, results of operations and statement of cash

flows of a parent entity together with subsidiaries in which the

parent entity has a controlling financial interest (which are

required to be consolidated under U.S. GAAP).

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The Commission requested comment on all aspects of its proposed FCS

definition, including whether the Commission should instead adopt the

``control test'' proposed by the Prudential Regulators, which focused

solely on the level of ownership and control a U.S. person would have

over a non-U.S. subsidiary.\85\

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\85\ See Proposal, 80 FR at 41386. See also Prudential

Regulators' Proposed Margin Rule, 79 FR at 57379.

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b. Comments

A few commenters expressed strong support for the FCS concept.\86\

AFR and Better Markets characterized it as an improvement to the cross-

border approach to margin taken in the Guidance, calling it a ``logical

and reasonable approach'' to capturing non-U.S. subsidiaries of U.S.

swap entities that may expect an implicit guarantee from a U.S. parent

and an ``effective remedy to evasion.'' \87\ AFR stated that, by virtue

of being included in the same consolidated financial statement, an FCS

has a direct financial impact on its U.S. ultimate parent entity, even

absent a direct recourse guarantee.\88\

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\86\ See AFR at 4-5; Better Markets at 5; IATP at 3, 5-6.

\87\ See AFR at 4 (FCS concept ``economizes'' Commission

resources by tying regulatory coverage to ``easily available''

accounting information). See also Better Markets at 5 (Guidance

should be amended to apply FCS concept to all Title VII

requirements).

\88\ See AFR at 4. See also IATP at 3 (inclusion in another's

consolidated financial statement indicates a potential risk to that

entity).

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Nevertheless, AFR and IATP expressed some concern over the reliance

on U.S. GAAP, particularly with respect to its ability to capture off-

balance sheet entities.\89\ IATP suggested that the Commission consider

including in the FCS definition an option to carry out the consolidated

financial reporting according to International Financial Reporting

Standards (``IFRS'').\90\ AFR also expressed concern that reliance on

U.S. GAAP may not capture all entities that could expect an implicit

guarantee from a U.S. parent, including privately held entities that

are not required to prepare consolidated financial statements under

U.S. GAAP, and certain variable interest entities or owned funds.\91\

---------------------------------------------------------------------------

\89\ See AFR at 5 (prior to the passage of U.S. Financial

Accounting Standards Board (``U.S. FASB'') Statements Nos. 166 and

167, U.S. GAAP accounting failed to properly require the

consolidation of many securitization entities and such gaps could

appear in the future).

\90\ See IATP at 6 (reliance on IFRS should be predicated on the

IFRS agreeing with U.S. FASB participation and offering improved

handling of off-balance sheet entities compared to U.S. GAAP).

\91\ See AFR at 4-5.

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AFR and IATP therefore urged the Commission to expand the FCS

definition in a few ways. Both recommended that the FCS definition

include entities whose U.S. parent entity is not required to prepare

consolidated financial statements (e.g., a private partnership) but

that would otherwise meet the standard for consolidation.\92\ AFR

argued that failing to include such entities within the meaning of

``FCS'' could result in entities with a similar nexus to the U.S.

financial system being treated differently based on factors such as

whether the ultimate parent is publicly traded.\93\ AFR also urged the

Commission to incorporate a facts-and-circumstances test for

determining when a foreign subsidiary's relationship with its U.S.

parent may create a sufficient nexus to require compliance with U.S.

margin rules.\94\

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\92\ See AFR at 4-5; IATP at 6 (it would not be

``inconceivable'' for U.S. CSE to spin off swaps trading activities

as private partnerships).

\93\ See AFR at 5.

\94\ See id.

---------------------------------------------------------------------------

A few commenters opposed the FCS concept altogether.\95\ IIB/SIFMA

argued that, absent a legal obligation to provide support, an FCS's

potential effect on its U.S. ultimate parent entity is not sufficiently

``direct'' to create a nexus to the U.S. financial system within the

meaning of CEA section 2(i).\96\ Nevertheless, most commenters,

including IIB/SIFMA, preferred the proposed FCS definition to the

control test proposed by the Prudential Regulators.\97\ IIB/SIFMA also

appreciated that the proposed FCS definition would foreclose the

possibility of such a non-U.S. CSE having multiple parent entities.\98\

---------------------------------------------------------------------------

\95\ See, e.g., AIMA/IA at 3 (touting potential operational

costs involved with obtaining counterparty representations regarding

FCS status); FSR at 10 (FCS concept is ``not necessary'' because

FCSs will be subject to foreign regulation); IIB/SIFMA at 19-20

(Commission should not distinguish FCSs from other non-U.S. CSEs).

\96\ See IIB/SIFMA at 14 (``chain of intervening factors and

events,'' including ``materiality'' of FCS to parent entity, that

could affect a U.S. parent's decision to provide support is too long

and uncertain).

\97\ See FSR at 10 (a control test may not clearly identify the

non-U.S. covered swap entities that are likely to raise greater

supervisory concerns); IATP at 6; IIB/SIFMA at 19-20 (reliance on

the familiar standards of U.S. GAAP would promote legal certainty);

ISDA at 13 (a control test is not appropriate for the application of

margin rules).

\98\ See IIB/SIFMA at 19-20.

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c. Final Rule

The Final Rule defines ``Foreign Consolidated Subsidiary'' as

proposed.\99\ Specifically, ``Foreign Consolidated Subsidiary'' means a

non-U.S. CSE in which an ultimate parent entity that is a U.S. person

has a controlling financial interest, in accordance with U.S. GAAP,

such that the U.S. ultimate parent entity includes the non-U.S. CSE's

operating results, financial position and statement of cash flows in

the U.S. ultimate parent entity's consolidated financial statements, in

accordance with U.S. GAAP. The term ``ultimate parent entity'' means

the parent entity in a consolidated group in which none of the other

entities in the consolidated group has a controlling interest, in

accordance with U.S. GAAP.\100\

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\99\ See 17 CFR 23.160(a)(1).

\100\ See 17 CFR 23.160(a)(6). The definition of ``Foreign

Consolidated Subsidiary'' refers only to the U.S ultimate parent

entity. The Commission believes that this is appropriate because

consolidated financial statements are the financial statements of a

group under the control of the ultimate parent entity. Where the

ultimate parent entity is a non-U.S. person, the non-U.S. CSE is not

categorized as an FCS and therefore would be eligible for the

Exclusion (assuming that the other conditions of the Exclusion are

satisfied), for the reasons discussed in section II.B.3.

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The Commission believes that the FCS concept offers a clear,

bright-line test for identifying those non-U.S. CSEs whose uncleared

swap activities present a greater supervisory interest relative to

other non-U.S. CSEs. Under U.S. GAAP, an FCS' financial statements are

consolidated with its U.S. ultimate parent entity by virtue of the

parent's

[[Page 34827]]

controlling financial interest in the FCS. By virtue of having its

financial statements consolidated with those of its U.S. ultimate

parent, the financial position, operating results and statement of cash

flows of an FCS are included in the financial statements of its U.S.

ultimate parent entity and therefore affect the financial position,

risk profile and market value of the U.S. ultimate parent. Because of

the FCS' direct relationship with, and the possible negative impact of

its swap activities on, its U.S. ultimate parent entity and the U.S.

financial system, an FCS raises greater supervisory concern in the

United States relative to other non-U.S. CSEs (in each case provided

that the obligations under the relevant swap are not guaranteed by a

U.S. person).\101\

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\101\ The Commission notes that it has a relatively greater

supervisory interest in FCSs than other non-U.S. CSEs, even if they

have a U.S. subsidiary or affiliate, because an FCS's ultimate

parent entity is a U.S. person.

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Further, the Commission continues to believe that, in the absence

of a direct recourse guarantee from a U.S. person, an FCS should not be

treated in the same manner as a U.S. CSE or U.S. Guaranteed CSE. In

contrast with a U.S. Guaranteed CSE, in the event of the FCS's default,

the U.S. ultimate parent entity does not have a legal obligation to

fulfill the obligations of the FCS. Rather that decision would depend

on the business judgment of its parent.

By relying on a consolidation test, the FCS concept is intended to

provide a clear, bright-line test for identifying those non-U.S. CSEs

whose uncleared swaps are likely to raise greater supervisory concerns

relative to other non-guaranteed non-U.S. CSEs. The Commission further

believes that, as some commenters noted, reliance on familiar U.S. GAAP

accounting standards will promote legal certainty. In particular, the

Commission notes that consolidation accounting is a longstanding part

of U.S. GAAP and that all non-U.S. CSEs with a U.S. ultimate parent

entity currently prepare consolidated financial statements.

With respect to the definition's reliance on U.S. GAAP, the

Commission notes that since the 2008 financial crisis, the U.S. FASB

made significant changes to the consolidation model for variable

interest entities (``VIEs'') and that as a result of these changes,

more VIEs (including special purpose vehicles) are being consolidated

with other entities (i.e., their parent entities) under U.S. GAAP.

Furthermore, because the U.S. GAAP consolidation requirement adequately

addresses these VIEs, the Commission believes that the addition of IFRS

as an option is likely to inject unnecessary complexity and costs in

many circumstances.\102\ Accordingly, the Commission believes that the

U.S. GAAP consolidation test in the FCS definition is sufficiently

similar to the IFRS consolidation standard with respect to VIEs so that

additional reliance on the IFRS standard would be neither necessary nor

beneficial.\103\

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\102\ The Commission notes that the standards for consolidation

under U.S. GAAP's VIE model are similar to the consolidation

standards that would apply under IFRS, as both consider control over

one entity by the other. The Commission further notes that it does

not believe that special purpose vehicles are likely to be used to

conduct swaps business. Even if such vehicles transact in swaps and,

consequently, register as CSEs, the ultimate parent entity would

likely exercise control over them because these vehicles typically

rely on parental support or guarantees to maintain their credit

standards. Such control would lead to consolidation under U.S. GAAP.

\103\ The Commission notes that although privately held

companies are not under a regulatory obligation to prepare and file

consolidated financial statements pursuant to U.S. GAAP, they

nevertheless are likely to prepare consolidated financial statements

for other purposes (e.g., to provide to creditors as a condition to

loan or to private investors), in which case their foreign

subsidiaries may fall within the parameters of the FCS definition.

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4. Counterparty Representations

The proposed rule provided that market participants should

generally be permitted to reasonably rely on counterparty

representations with regard to their status as a U.S. person. The

Commission received comments regarding its proposed reliance standard

\104\ and a request that the Commission also permit reliance on

counterparty representations with respect to the guarantee and FCS

definitions.\105\

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\104\ See, e.g., SIFMA AMG at 12 (standard for reliance on

counterparty representations with respect to U.S. person status is

consistent with that articulated in Guidance and Commission's

external business conduct rules; proposed rule could be read to

require ``further, unnecessary diligence'').

\105\ See, e.g., id.

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The Commission acknowledges that the information necessary for a

swap counterparty to accurately assess the status of its counterparties

as U.S. persons or FCSs, or to determine whether a non-U.S.

counterparty's obligations under a swap are guaranteed by a U.S.

person, may be unavailable, or available only through overly burdensome

due diligence. For this reason, the Commission believes that a market

participant should generally be permitted to reasonably rely on written

counterparty representations in each of these respects. The Commission

clarifies that, consistent with the reliance standard articulated in

the Commission's external business conduct rules,\106\ market

participants may reasonably rely on such a counterparty representation

unless it has information that would cause a reasonable person to

question the accuracy of the representation.

---------------------------------------------------------------------------

\106\ See 17 CFR 23.402(d).

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B. Applicability of Margin Requirements to Cross-Border Uncleared Swaps

The following sections discuss the cross-border application of the

margin requirements to swaps between CSEs and their counterparties,

including when substituted compliance and the Exclusion are applicable.

Section 1 provides a brief overview of the proposed rule; section 2

addresses the availability of substituted compliance; section 3

addresses the availability of the Exclusion; section 4 discusses a

special provision in the Final Rule for non-segregation jurisdictions;

and section 5 discusses a special provision in the Final Rule for non-

netting jurisdictions.

1. Proposed Rule

Under the proposed rule, the application of substituted compliance

and the scope of the Exclusion closely tracked the Prudential

Regulators' Proposed Margin Rule.\107\ Specifically:

---------------------------------------------------------------------------

\107\ See 79 FR at 57379-81.

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A U.S. CSE would be required to comply with the

Commission's margin rules for all uncleared swaps but would be eligible

for substituted compliance with respect to the requirement to post (but

not the requirement to collect) initial margin for swaps with certain

non-U.S. counterparties (referred to herein as ``partial substituted

compliance'').\108\

---------------------------------------------------------------------------

\108\ U.S. CSEs would not be eligible for substituted compliance

with respect to the requirement that they collect initial margin or

the requirement to post or collect variation margin.

---------------------------------------------------------------------------

A U.S. Guaranteed CSE would receive the same treatment as

a U.S. CSE.

A non-U.S. CSE whose obligations under the relevant swap

are not guaranteed by a U.S. person would be eligible for substituted

compliance unless the counterparty to the swap is a U.S. CSE or U.S.

Guaranteed CSE, in which case substituted compliance would be available

with respect to the requirement to collect (but not the requirement to

post) initial margin (also referred to as ``partial substituted

compliance'').

A non-U.S. CSE would be eligible for an exclusion from the

Final Margin Rule when trading with a non-U.S. person counterparty

provided that (a) neither party's obligations under the relevant swap

are guaranteed by a U.S.

[[Page 34828]]

person; (b) neither party is an FCS; and (c) the swap is not conducted

by or through a U.S. branch of a non-U.S. CSE.

The Commission requested comment on all aspects of the proposed

rule, including how the rule should treat FCSs (e.g., whether they

should be offered the same treatment as U.S. Guaranteed CSEs or

conversely be offered the Exclusion), whether U.S. branches should be

eligible for the Exclusion, and whether the Commission should provide

exceptions related to certain ``emerging markets'' or non-netting

jurisdictions.\109\

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\109\ See Proposal, 80 FR at 41387, 88-91.

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2. Substituted Compliance

a. Comments

Most commenters argued for the greater availability of substituted

compliance. Some requested that all CSEs, whether a U.S. persons or a

non-U.S. person, be eligible for full substituted compliance with

respect to all comparable foreign margin requirements, including any

swap dealer in a BCBS-IOSCO framework-compliant jurisdiction.\110\

Others phrased their requests in narrower terms, arguing for the

broader availability of substituted compliance for U.S. CSEs and/or

U.S. Guaranteed CSEs when trading with non-U.S. persons.\111\

Commenters generally argued that requiring CSEs to comply with the

Commission's margin requirements in the face of comparable foreign

margin requirements would undermine international efforts to develop a

consistent global swaps regime and impose unnecessary and costly

compliance burdens, resulting in competitive disparities and market

inefficiencies.\112\ Several commenters also argued that the proposed

rule would involve substantial operational costs, including

categorizing market participants and developing appropriate

documentation.\113\

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\110\ See, e.g., AIMA/IA at 4-5 (substituted compliance should

be ``all encompassing, and applicable to all parties to a

transaction''); ICI Global at 2, 9 (substituted compliance should be

made available ``without qualification'' wherever foreign

jurisdiction's margin requirements are comparable); ISDA at 2, 7-8

(substituted compliance should be available for any transaction

subject to foreign requirements comparable to BCBS-IOSCO framework);

SIFMA AMG 4, 6-8 (market participants should be allowed ``to comply

with a single set of substantive margin requirements for all

uncleared swaps''). See also ABA/ABASA at 3 (market participants

should be allowed to rely on substituted compliance ``to the

greatest possible degree across the markets in and structures

through which they operate'').

\111\ See, e.g., FSR at 7 (U.S. CSEs should be able to rely on

substituted compliance for both posting and collecting of initial

margin when trading with non-U.S. CSEs and their foreign branches be

extended full substituted compliance); IIB/SIFMA at 4-9 (substituted

compliance should be available for U.S. CSEs and U.S. Guaranteed

CSEs with respect to all margin requirements, including posting and

collecting both initial and variation margin); JBA at 8-9

(availability of substituted compliance for U.S. Guaranteed CSEs is

too limited); PensionsEurope at 2 (``full substituted compliance,''

including collection of initial margin and variation margin, should

be available for transactions between U.S. Guaranteed CSEs and

``financial institutions without a U.S. nexus'').

\112\ See, e.g., AIMA/IA at 1; FSR at 3-7; ICI Global at 8-9.

See also Vanguard at 2 (applying substituted compliance on a

``transaction-by-transaction basis'' would undermine ``the

fundamental risk mitigation tool of cross-transactional close-out

netting'').

\113\ See, e.g., AIMA/IA at 1 (proposed rule would require a

``significant amount of replacement and additional documentation to

account for different counterparty combinations''); ISDA at 5

(operational complexity of proposed substituted compliance regime

would further increase operating costs); IIB/SIFMA at 7 (CSEs would

not know sufficient information about businesses of their

counterparties to categorize them, and non-U.S. counterparties would

not be familiar with, and would be reluctant to hire counsel to

determine, all U.S. laws relevant to making the determination);

SIFMA AMG at 6 (highlighting complications in determining

availability of substituted compliance on basis of counterparty

status in context of block trades).

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With respect to U.S. CSEs and U.S. Guaranteed CSEs, IIB/SIFMA and

ISDA argued that compliance with the Commission's margin requirements

was not necessary to prevent the transmission of risk to the U.S.

financial system because the risk would be adequately addressed by

comparable foreign margin requirements.\114\ IIB/SIFMA argued that the

proposed substituted compliance regime could actually increase

liquidity risk by discouraging non-U.S. counterparties from trading

with U.S. CSEs and U.S. Guaranteed CSEs in order to avoid costs

associated with understanding and complying with the Commission's

margin requirements, and that the resulting increased concentration of

bilateral credit exposures among U.S. CSEs and U.S. Guaranteed CSEs

would increase the risk of contagion in U.S. markets.\115\ ISDA further

argued that ``[c]omity and respect for the supervisory interests of

non-U.S. regulators'' argue in favor of full substituted compliance or

exclusion for swaps involving non-U.S. person counterparties.\116\ FSR

argued that substituted compliance is at least necessary for foreign

branches because they are likely to be subject to foreign margin

requirements and pose the same concerns to foreign regulators as the

U.S. branches of non-U.S. CSEs pose to U.S. regulators.\117\

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\114\ See IIB/SIFMA at 5; ISDA at 6-7. See also ICI Global at 9

(by not permitting substituted compliance in certain instances,

Commission would effectively be determining that foreign margin

requirements are not ``good enough'' despite being found

comparable).

\115\ See IIB/SIFMA at 6-7.

\116\ See ISDA at 6.

\117\ See FSR at 7-8. See also AIMA/IA at 3 (absence of

substituted compliance for foreign branches of U.S. CSEs is an

``apparent gap[ ]'').

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Several commenters raised concerns with regard to the proposal to

allow partial substituted compliance.\118\ SIMFA AMG argued that

partial substituted compliance would be ``inconsistent with the

importance of bilateral margining,'' add unnecessary costs and

complexity, and increase the potential for margin disputes.\119\ AIMA/

IA argued that developing a legal agreement allowing for the transfer

of margin amounts according to more than one margin regime would be

``commercially and legally problematic.'' \120\ As a result, market

participants would default to complying with the Commission's margin

requirements, negating the value of substituted compliance.\121\ ISDA

similarly argued that developing a standardized model for initial

margin that could account for different margin rules in one netting set

would be ``impractical'' in the available timeframe for

compliance.\122\ FSR argued that partial substituted compliance was not

``in the spirit of the International Standards'' \123\ and pointed out

that its usefulness may be questionable, given that no other foreign

jurisdiction has proposed a similar approach.\124\

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\118\ See, e.g., AIMA/IA at 4; FSR at 7; ISDA at 3, 5; SIFMA AMG

at 10.

\119\ See SIFMA AMG at 10 (highlighting additional complexities

in calculating margin for clients using multiple asset managers).

\120\ See AIMA/IA at 4.

\121\ See id.

\122\ See ISDA at 9 (counterparties wanting to use a single

custodian could face additional challenges, as the custodial

arrangement would have to be drafted to accommodate overlapping and

potentially inconsistent requirements for segregation).

\123\ See proposed 17 CFR 23.160(a)(3) (defining ``International

Standards'' as based on the BCBS-IOSCO framework).

\124\ See FSR at 7.

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IATP, on the other hand, supported the proposed substituted

compliance regime.\125\ IATP agreed that FCSs should be granted

substituted compliance but not U.S. Guaranteed Affiliates because

losses from the swaps of an FCS may have a negative impact on the

foreign jurisdiction's economy.\126\ IATP also agreed that U.S.

Guaranteed Affiliates should not be eligible for substituted compliance

with respect to the requirement to collect

[[Page 34829]]

initial margin from a non-U.S. counterparty.\127\ AFR described the

proposed rule as creating a ``very significant scope for substituted

compliance'' with respect to non-U.S. CSEs, but suggested that the

scope would not be a concern provided the substituted compliance were

limited to foreign rules that are ``very similar'' to U.S. margin

requirements.\128\

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\125\ See IATP at 3-4 (proposed rule would provide ``the

greatest opportunity for effective risk mitigation against swaps

counterparty default'' and would be a ``critical step'' to ensuring

that ``de-guaranteed'' swaps ``will not continue to elude effective

regulation'').

\126\ See IATP at 7.

\127\ See id.

\128\ See AFR at 7. See also id. at 4 (scope of substituted

compliance could become ``overbroad'' given that proposed rule

included narrow definition of ``guarantee'' and limited Foreign

Consolidated Subsidiaries to subsidiaries of registered CSEs).

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b. Final Rule

The Commission has determined to adopt a cross-border framework

largely as proposed, but with certain modifications to address concerns

raised by commenters and to further align the rule with the cross-

border approach adopted by the Prudential Regulators. Generally

speaking, the cross-border margin framework in the Final Rule reflects

the Commission's efforts to carefully tailor the application of the

Commission's margin requirements to address comity considerations and

mitigate potential adverse impact on market efficiency and competition

without compromising the safety and soundness of CSEs. The availability

of substituted compliance under the Final Rule therefore depends on the

degree of nexus the CSEs and their counterparties have to the U.S.

financial system, as indicated by their status (e.g., whether they are

U.S. persons or non-U.S. persons whose obligations under the relevant

swap are guaranteed by a U.S. person).

i. Uncleared Swaps of U.S. CSEs and U.S. Guaranteed CSEs

As a general rule, the Commission believes that, in light of their

position in the U.S. financial system, U.S. persons and U.S. Guaranteed

CSEs should be required to comply with the Commission's margin

requirements. Under the Final Rule, however, U.S. CSEs and U.S.

Guaranteed CSEs would be eligible for substituted compliance with

respect to the requirement to post (but not the requirement to collect)

initial margin provided that the counterparty is a non-U.S. person

whose obligations under the relevant swap are not guaranteed by a U.S.

person. By virtue of their being domiciled or organized in the United

States, U.S. CSEs give rise to greater supervisory interests relative

to other CSEs. U.S. Guaranteed CSEs create a similar supervisory

interest because, as discussed in the proposed rule, the swap of a non-

U.S. CSE whose obligations under the swap are guaranteed by a U.S.

person is identical, in relevant aspects, to a swap entered into

directly by a U.S. person.

Nevertheless, the Commission believes that, in the interest of

comity, permitting substituted compliance for the limited requirement

of posting initial margin would be reasonable. While requiring a CSE to

post initial margin protects the counterparty in the event of default

by the CSE, it also serves as a risk management tool because it limits

the amount of leverage a CSE can incur by requiring that it have

adequate eligible collateral to enter into an uncleared swap.

Accordingly, when the counterparty is a non-U.S. person (whose

obligations under the swap are not guaranteed by a U.S. person), the

Commission believes that substituting the foreign margin requirements

with regard to the initial margin posted would be reasonable. The

Commission further believes that allowing substituted compliance in

this limited instance may reduce transaction costs for U.S. CSEs when

trading with non-U.S. counterparties \129\ and thereby mitigate

potential competitive disparities (relative to other CSEs and non-CFTC

registered dealers operating in the foreign jurisdiction), while

ensuring that the U.S. CSE is adequately protected in the event of

default of the non-U.S. counterparty. The availability of substituted

compliance is limited to circumstances where the non-U.S.

counterparty's obligations under the relevant swap are not guaranteed

by a U.S. person in order to avoid incentivizing market participants to

structure their swaps solely for purposes of avoiding application of

the Commission's margin requirements.\130\

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\129\ That is, if the initial margin amount required to be

posted under the foreign rule is lower than the amount required

under the Commission's Final Margin Rule, and the parties elect for

the CSE to post margin pursuant to the foreign margin requirements,

the lower margin may reduce the U.S. CSE's funding costs.

\130\ For example, if partial substituted compliance were

available for non-U.S. counterparties that are guaranteed by a U.S.

person, a swap between a U.S. CSE and a U.S. counterparty could be

restructured as a swap between a U.S. CSE and a non-U.S.

counterparty that is guaranteed by a U.S. person in order to avoid

application of the Commission's margin requirements.

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The Commission does not believe that partial substituted compliance

would prohibit the use of a single netting set for calculating initial

margin. Under the Final Rule, a U.S. CSE can comply with the

Commission's initial margin requirements by posting pursuant to

comparable foreign margin requirements. Accordingly, from the

Commission's perspective, one netting set could encompass swaps that

comply with both foreign and CFTC initial margin requirements.\131\

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\131\ The Commission similarly does not expect that reliance on

partial substituted compliance will hinder the development or use of

a standardized model for initial margin, as the Commission believes

that a single model could be developed to satisfy the initial margin

requirements of multiple jurisdictions.

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The Commission understands that CSEs relying on partial substituted

compliance may face certain costs or challenges not experienced by non-

U.S. CSEs that are eligible for full substituted compliance.

Nevertheless, as discussed above, the Commission believes that granting

substituted compliance more broadly (e.g., permitting both collection

and posting of initial margin pursuant to the foreign requirements)

would not be appropriate for a swap transaction involving a U.S. CSE or

a U.S. Guaranteed CSE. Moreover, U.S. CSEs and U.S. Guaranteed CSEs

that elect to rely on partial substituted compliance may realize

savings in the form of reduced funding costs (to the extent that

foreign jurisdiction requires less initial margin to be posted), and

their non-U.S. counterparties may experience lower operational costs as

a result of only having to comply with their home jurisdiction's

requirements.

Finally, the Commission does not believe it would be appropriate to

broaden the scope of substituted compliance available to swaps

conducted through foreign branches of U.S. CSEs. A foreign branch is

legally indistinguishable from the U.S. CSE itself, such that the whole

U.S. CSE, and not merely the foreign branch, holds itself out to the

market and assumes the risks of any uncleared swap transactions

conducted by or through the foreign branch. Accordingly, swaps

conducted through a foreign branch of a U.S. CSE are appropriately

treated the same as swaps of the U.S. CSE as a whole. Moreover, if the

Commission were to allow broader substituted compliance for swaps

conducted through foreign branches than swaps conducted domestically,

U.S. CSEs could be incentivized to conduct swap activity through

foreign branches to avoid direct compliance with Commission's margin

requirements.

ii. Uncleared Swaps of Non-U.S. CSEs (Including FCSs) Whose Obligations

Under the Relevant Swap Are Not Guaranteed by a U.S. Person

Under the Final Rule, consistent with the Proposed Rule, non-U.S.

CSEs (including FCSs) whose obligations under the relevant uncleared

swap are

[[Page 34830]]

not guaranteed by a U.S. person may avail themselves of substituted

compliance to a greater extent than U.S. CSEs and U.S. Guaranteed CSEs.

Specifically, where the obligations of a non-U.S. CSE (including an

FCS) under the relevant swap are not guaranteed by a U.S. person,

substituted compliance is available with respect to its uncleared swaps

with any counterparty, other than a U.S. CSE or a U.S. Guaranteed

CSE.\132\

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\132\ With respect to uncleared swaps of a non-U.S. CSE whose

obligations under the swap are not guaranteed by a U.S. person, on

the one hand, with a U.S. CSE or a U.S. Guaranteed CSE, on the other

hand, substituted compliance would only be available for initial

margin collected by the non-U.S. CSE whose obligations under the

relevant swap are not guaranteed by a U.S. person, as discussed

above.

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The broad substituted compliance framework available to this

category of non-U.S. CSEs reflects the Commission's recognition of

foreign jurisdictions' supervisory interest in CSEs that are domiciled

and operating in their jurisdictions. In addition, the Commission

understands that compliance with two sets of margin regulations may

lead to costs and burdens for non-U.S. CSEs not faced by their

competitors in the local jurisdiction and may provide disincentives for

foreign clients to transact with a non-U.S. CSE. The Commission

believes that making substituted compliance broadly available to non-

U.S. CSEs that are not guaranteed by a U.S. person may help to reduce

the potential adverse impact on market efficiency and competition,

without compromising the protections for the non-U.S. CSE and the U.S.

financial markets.

As discussed in the next section, a non-U.S. CSE that is not an FCS

will be eligible for the Exclusion from the Commission's margin rules

under certain circumstances. However, uncleared swaps entered into by

an FCS will not be eligible for any exclusion because of its

relationship with its U.S. ultimate parent entity, and because of the

possible negative impact of its swap activities on its U.S. ultimate

parent entity and the U.S. financial system. As explained in section

II.A.3.c. above, the financial position, operating results, and

statement of cash flows of an FCS are included in the financial

statements of the U.S. ultimate parent entity and therefore have a

direct impact on the consolidated entity's financial position, risk

profile, and market value. The Commission is also concerned that

extending the Exclusion to FCSs would incentivize U.S. entities to

conduct their swap activities with non-U.S. counterparties through non-

U.S. subsidiaries solely in order to avoid application of the Dodd-

Frank Act margin requirements, leading to further bifurcation between

U.S. and non-U.S. swap business.

The Commission recognizes that its decision not to extend the

Exclusion to FCSs could put them at a disadvantage relative to other

non-U.S. market participants/swap dealers (including those that are

CSEs).\133\ However, given the supervisory concerns raised by the nexus

between FCSs and their U.S. ultimate parent entity, the Commission

believes that extending the Exclusion to an FCS would not further the

paramount statutory objective of ensuring the safety and soundness of a

CSE and the stability of U.S. financial markets. The Commission notes

that potential competitive disparities may be mitigated to the extent

that the relevant foreign jurisdiction implements comparable margin

requirements.

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\133\ For example, a non-U.S. CSE relying on the Exclusion or

non-CFTC registered swap dealers may be able to realize cost savings

and offer better pricing terms to foreign clients.

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3. Exclusion

a. Comments

Several commenters supported the Exclusion because they believed

that it recognized the absence of a U.S. jurisdictional nexus.\134\

Nevertheless, these commenters requested that the Exclusion be expanded

to include U.S. branches of non-U.S. CSEs and FCSs.\135\

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\134\ See ICI Global at 2, 5; IIB/SIFMA at 10.

\135\ See id. See also ISDA at 3 (Exclusion should be expanded

to include any swap between a non-U.S. CSE, whether or not

guaranteed, and any non-U.S. person counterparty that is not

guaranteed by a U.S. person).

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With respect to U.S. branches, IIB/SIFMA argued that distinguishing

them would not be necessary from a risk-mitigation perspective because

the risk remains with the non-U.S. CSE outside the United States

regardless of whether the non-U.S. CSE involves U.S. personnel.\136\

ISDA and ICI Global further argued that treating U.S. branches

differently from the rest of the CSE could create ``significant

operational issues and credit risks.'' \137\ ICI Global stated that the

same ISDA Master Agreement typically governs all transactions involving

both the U.S. and non-U.S. branches of a non-U.S. CSE, and that not

granting the Exclusion to swaps between a non-U.S. person and a U.S.

branch of a non-U.S. CSE (whose obligations are not guaranteed by a

U.S. person) may require parties to document transactions with the U.S.

branch under a separate master agreement, which could create

operational difficulties.\138\ ICI Global also expressed concern that

disparate treatment of U.S. branches could lead to additional credit

risk because counterparties might lose netting benefits under

bankruptcy laws.\139\

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\136\ See IIB/SIFMA at 16.

\137\ See IIB/SIFMA at 16; ICI Global at 10-11.

\138\ See ICI Global at 10-11.

\139\ See also ISDA at 11 (fragmenting netting sets could

increase risk and discourage use and employment of U.S. personnel).

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With respect to FCSs, ICI Global argued that consolidation is

insufficient to create a ``direct'' U.S. nexus because the U.S.

ultimate parent is not under a legal obligation to support the

FCS.\140\ IIB/SIFMA added that foreign jurisdictions have not proposed

to apply margin rules to foreign, non-guaranteed subsidiaries and that

the Commission should extend the Exclusion to avoid overlapping

requirements that could lead market participants to avoid trading with

an FCS.\141\ Although substituted compliance would potentially be

available in place of the Exclusion, ISDA asserted that the difference

between the Exclusion and substituted compliance is not costless, as

affected swap dealers would incur costs of complying with any

conditions imposed with respect to substituted compliance and with the

Commission's exercise of its related examination authority, in addition

to lost business that could result if substituted compliance is not

``seamless'' and counterparties are ``inconvenienced'' by its

application.\142\

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\140\ See ICI Global at 11. See also IIB/SIFMA at 14 (CEA

section 2(i) does not authorize the Commission to regulate a foreign

subsidiary solely due to potential for support from and risk to a

U.S. parent entity because, absent a legal obligation to provide

support, the ``chain of intervening factors and events'' that might

lead to such support would not satisfy ``direct'' requirement in CEA

section 2(i)).

\141\ See IIB/SIFMA at 15.

\142\ See id. at 7.

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As an alternative to extending the Exclusion to FCSs, IIB/SIFMA

suggested that the Commission grant an exclusion to FCSs operating

without a U.S. guarantee when transacting with non-U.S. persons

operating without a U.S. guarantee, up to an aggregate 5 percent limit

on the notional trading volume in uncleared swaps entered into by

commonly controlled FCSs under the exclusion relative to the total

notional swap trading volume of entities within the common U.S.

ultimate parent entity's consolidated group.\143\ IIB/SIFMA argued that

such a limited exclusion would achieve the Commission's risk mitigation

objectives

[[Page 34831]]

without directly regulating wholly non-U.S. counterparties.\144\

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\143\ See IIB/SIFMA at 16.

\144\ See id.

---------------------------------------------------------------------------

Both AFR and Better Markets expressed support for the proposal not

to extend the Exclusion to FCSs, describing it as a means of addressing

the issue of de-guaranteeing.\145\ AFR nevertheless expressed concern

that the Exclusion would apply to a non-U.S. CSE when entering into a

swap with a foreign subsidiary that is a financial end user that has a

U.S. ultimate parent, and suggested that the Commission also deny the

Exclusion in this case.\146\ AFR also suggested that the Commission

``supplement'' its approach by further denying the Exclusion to a non-

consolidated, non-U.S. subsidiary that could, based on the facts and

circumstances, have a ``major impact on the financial well-being of the

parent,'' including circumstances where the parent does not use U.S.

GAAP accounting.\147\

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\145\ See AFR at 2 (proposed rule would go ``some distance''

toward limiting evasion of Commission's margin requirements); Better

Markets at 5 (proposed rule ``adequately captures'' many foreign

affiliates that may have escaped U.S. margin requirements through

de-guaranteeing).

\146\ See AFR at 8 (foreign subsidiary of a U.S. financial end

user that is not a CSE would not be defined as an FCS even if

consolidated).

\147\ See AFR at 3. See also Better Markets at 2 (Exclusion is

needlessly complicated and indirect and Commission should address

issue more completely by reverting to and updating approach in

Guidance).

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b. Final Rule

The Commission has determined to adopt the Exclusion largely as

proposed, with a modification that preserves the Commission's intent

with respect to the treatment of inter-affiliate swaps under the Final

Margin Rule. Under the Final Rule, an uncleared swap entered into by a

non-U.S. CSE with a non-U.S. counterparty (including a non-U.S. CSE) is

excluded from the Commission's margin rules, provided that neither

counterparty's obligations under the relevant swap are guaranteed by a

U.S. person and neither counterparty is an FCS.\148\ This approach

reflects the Commission's recognition of foreign jurisdictions' strong

supervisory interest in the uncleared swaps of non-U.S. CSEs and their

non-U.S. counterparties, both of which are domiciled and operate

abroad. Under these circumstances, the Commission believes that it is

appropriate to make a limited exception to the principle of firm-wide

application of margin requirements, consistent with comity principles,

so as to exclude a narrow class of uncleared swaps involving a non-U.S.

CSE and a non-U.S. counterparty.\149\

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\148\ The Exclusion also does not apply if the counterparty is a

U.S. branch of a non-U.S. CSE. See 17 CFR 23.160(b)(2)(ii).

\149\ The Commission disagrees that the Commission lacks a

jurisdictional nexus with respect to swaps subject to the Exclusion.

To the contrary, as discussed above, by the terms of the relevant

statutory provision, CEA section 4s(e), and the underlying purpose

of that provision, the Commission's authority to adopt margin rules

applies to all CSEs, U.S. and non-U.S., and extends to all of their

uncleared swaps, regardless of the counterparties' domicile or the

location of the swaps transaction.

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The Commission notes that a non-U.S. CSE that can avail itself of

the Exclusion is still subject to the Commission's margin rules with

respect to all other uncleared swaps (i.e., those that do not qualify

for the Exclusion), with the possibility of substituted compliance. And

any excluded swaps may be covered by the margin requirements of another

jurisdiction that adheres to the BCBS-IOSCO framework.\150\

Additionally, the non-U.S. CSE would be subject to the Commission's

capital requirements, which, as proposed, would impose a capital charge

for uncollateralized exposures.\151\

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\150\ In this regard, the Commission notes that, as indicated in

supra note 23, representatives of 26 regulatory authorities

(comprising 17 nations) participated in the WGMR that developed the

BCBS-IOSCO framework. As of today, 24 of these 26 regulatory

authorities that participated in the WGMR have proposed a regulatory

framework for margin for uncleared swaps, all of which are

consistent with the BCBS-IOSCO framework. In addition, these 24

regulatory authorities have jurisdiction over more than 90% of the

swaps activities in the world by any measure.

\151\ See Proposed Capital Rule, 76 FR 27802.

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The Commission considered comments urging a broader scope of the

Exclusion to include, for example, any FCSs so long as their swaps are

not guaranteed by a U.S. person or alternatively, do not exceed a ``de

minimis'' level of swap activity. However, the Commission does not

believe that extending the Exclusion to uncleared swaps of FCSs is

appropriate given the nature of their relationship to their U.S.

ultimate parent entity. The limited scope of the Exclusion reflects

that the benefits of the margin requirement are achieved when it is

applied to all CSEs and on a firm-wide basis and therefore, any

exception needs to be carefully tailored to avoid creating a

significant supervisory gap and inappropriate levels of risk to the CSE

and the U.S. financial system.

The Commission also disagrees with comments that the Exclusion is

overly broad because it would extend to a swap between a non-U.S. CSE

and a foreign subsidiary of a U.S. financial end user.\152\ The

Commission notes that such a foreign subsidiary would not be an FCS

even if it is consolidated with its U.S. parent because it is not a

CSE. The Commission believes that a swap between such a foreign

subsidiary and a non-U.S. CSE should be eligible for the Exclusion

because financial end users are not covered swap entities and are

likely to include many entities that do not conduct a significant level

of swap activities; as such, their swap activities would not have the

same effect on the U.S. ultimate parent entity as would a covered swap

entity's. Therefore, the Exclusion applies to qualifying non-U.S. CSEs

when transacting with foreign subsidiaries that are financial end users

that have a U.S. ultimate parent entity.

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\152\ The term ``financial end user'' is defined in section

23.150 of the Final Margin Rule.

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Under the Final Margin Rule, a CSE is not required to collect

initial margin from its affiliate, provided, among other things, that

affiliate collects initial margin on its market-facing swaps or is

subject to comparable initial margin collection requirements (in the

case of non-U.S. affiliates that are financial end users) on its own

market-facing swaps. In order to preserve the Commission's intent with

respect to the treatment of inter-affiliate swaps under the Final

Margin Rule, the Exclusion is not available if the market-facing swap

of the non-U.S. CSE (that is otherwise eligible for the Exclusion) is

not subject to comparable initial margin collection requirements in the

home jurisdiction and any of the risk associated with the uncleared

swap is transferred, directly or indirectly, through inter-affiliate

transactions, to a U.S. CSE or a U.S. Guaranteed CSE. This condition is

intended to ensure that inter-affiliate swaps are not used to avoid the

requirement to collect initial margin from third-parties.\153\ The

limitation on the Exclusion is consistent with that rationale.

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\153\ See 17 CFR 23.159.

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Under the Final Rule, uncleared swaps of a U.S. branch of a non-

U.S. CSE are not eligible for the Exclusion. The Commission does not

believe extending the Exclusion to U.S. Branches would be appropriate.

Generally speaking, U.S. branches of foreign banks \154\ have a

Prudential Regulator and must therefore comply with the Prudential

Regulators' margin rules. The Prudential Regulators' Final Margin Rule

does not grant an exclusion for the uncleared swaps of such U.S.

branches on the basis that U.S. branches of foreign banks clearly

operate within the United States and could pose risk to

[[Page 34832]]

the U.S. financial system.\155\ To the extent that a U.S. branch of a

non-U.S. CSE is subject to the Commission's requirements rather than a

Prudential Regulator, the Final Rule appropriately harmonizes with the

Prudential Regulators.\156\ Additionally, given that U.S. branches

operate within the United States, allowing their swaps to be excluded

from application of the Commission's margin requirements could

disadvantage U.S. CSEs when competing with U.S. branches for U.S.

clients \157\ and create incentives for CSEs to operate through U.S.

branches solely for purposes of avoiding the Dodd-Frank Act margin

requirements. Accordingly, the Commission believes that a non-U.S. CSE

should be subject to the Commission's margin requirements when

conducting swap activities from within the United States by or through

a U.S. branch.\158\

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\154\ See Prudential Regulators' Final Margin Rule, 80 FR at

74901 (setting forth the definition of ``foreign bank'' for purposes

of the Prudential Regulators' Final Margin Rule).

\155\ See Prudential Regulators' Final Margin Rule, 80 FR at

74883.

\156\ Under the International Banking Act of 1978, 12 U.S.C.

3101 et seq., U.S. branches are generally treated the same as

national banks operating in that same location and are subject to

the same laws, regulations, policies, and procedures that apply to

national banks.

\157\ That is, a U.S. branch of a non-U.S. CSE that is permitted

to operate outside of the Commission's margin requirements may, by

virtue of being subject to reduced or even no margin requirements,

be able to offer a more competitive price to U.S. clients than a

U.S. CSE.

\158\ As noted above in section II.B.3.a., some commenters

suggested that not extending the Exclusion to U.S. branches of non-

U.S. CSEs could require non-U.S. CSEs to document transactions with

the U.S. branch under a separate ISDA Master Agreement, creating

operational challenges. However, because such U.S. branches are

eligible for substituted compliance, use of a separate credit

support agreement to document transactions with a non-U.S. CSE's

U.S. branch should only be necessary where foreign margin

requirements are not comparable. Although the Commission

acknowledges that the non-U.S. CSE may need to use a separate credit

support agreement for U.S. branch transactions in this limited case,

the Commission nevertheless believes that it would not be

appropriate to extend the Exclusion to U.S. branches of non-U.S.

CSEs for the reasons discussed above.

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4. Special Provision for Non-Segregation Jurisdictions \159\

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\159\ The term ``emerging market'' is not used in the Final Rule

because some jurisdictions covered by this provision of the Final

Rule are not aptly described by that term.

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a. Comments

Several commenters supported the creation of a de minimis exception

similar to the emerging markets exemption set out in the Guidance.\160\

Specifically, commenters recommended that U.S. CSEs be exempt from the

margin requirements when trading with ``emerging market

counterparties'' provided that the aggregate notional volume of its

uncleared swaps with emerging market counterparties does not exceed 5

percent of the CSEs' total notional swap trading volume, both cleared

and uncleared.\161\ They further recommended defining ``emerging market

counterparty'' as a non-U.S. person that is (a) not a registered CSE,

(b) not guaranteed by a U.S. person, and (c) not located in a

jurisdiction covered by a comparability determination for uncleared

swaps margin rules issued by the Commission.\162\ Commenters generally

agreed that the exception should apply to foreign branches of U.S.

CSEs,\163\ but some commenters also recommended that it be extended to

U.S. Guaranteed CSEs \164\ and FCSs.\165\ For swaps between U.S.

Guaranteed CSEs and emerging market counterparties, ABA/ABASA and IIB/

SIFMA recommended that the de minimis threshold apply to the aggregate

volume of uncleared swaps guaranteed by a particular U.S. person,

rather than to the trading volume of the U.S. Guaranteed CSE

itself.\166\

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\160\ See, e.g., ABA/ABASA at 3-5; IIB/SIFMA at 3, 11-13; ISDA

at 2, 9-10; JBA at 10.

\161\ See ABA/ABASA at 5. See also ISDA at 9-10 (further

recommending that Commission impose recordkeeping requirement as

condition to exemption, as was included in Guidance).

\162\ See ABA/ABASA at 4-5; IIB/SIFMA at 13. See also ISDA at 9

(``emerging market counterparty'' should be defined as any non-U.S.

person that is not guaranteed by a U.S. person and that is not

located in one of six jurisdictions identified in Guidance as having

submitted requests for comparability determinations).

\163\ See ABA/ABASA at 1 n.5 (exemption should apply to ``U.S.-

based banking organizations, however they are operating in emerging

markets, including, but not limited to, through a foreign branch of

a prudentially-regulated CSE''); IIB/SIFMA; ISDA.

\164\ See ABA/ABASA at 1 n.5, 3; IIB/SIFMA at 12; ISDA at 9.

\165\ See ISDA at 10 (availability of the exemption should be

extended to FCSs if Commission does not otherwise make Exclusion

available to them).

\166\ See ABA/ABASA at 5; IIB/SIFMA at 13 (approach would be

appropriate given that risk to U.S. guarantor provides basis for

extraterritorial application of margin rules to U.S. Guaranteed

CSEs).

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In support of such an exception, commenters argued that legal and

operational constraints in emerging market jurisdictions could make

compliance with margin rules difficult, if not impossible.\167\ As a

result, broad application of the margin requirements to these swaps

could negatively impact the competitiveness of registered CSEs.\168\

Commenters argued that by limiting the exception to CSEs with a de

minimis level of swaps activity, the Commission could accomplish the

goal of ensuring a CSE's safety and soundness but with less disruption

to existing business relationships than the exchange of initial and

variation margin would impose.\169\ IIB/SIFMA also argued that the

exception would be consistent with CEA section 2(i), and encouraged the

Commission to coordinate with foreign regulators to develop a

consistent global approach to swaps with emerging market

counterparties.\170\

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\167\ See, e.g., ABA/ABASA at 4 (local banking sector may lack

operational infrastructure to support daily exchange of margin or

third-party custodial arrangements); IIB/SIFMA (local legal regime

may not recognize concept of netting); ISDA at 4 (emerging market

counterparties may be unable to comply with U.S. margin

requirements).

\168\ See ABA/ABASA at 4 (absent an exemption, U.S. CSEs could

lose not only derivatives business but associated commercial and

investment banking relationships); IIB/SIFMA at 12 (emerging market

counterparties are likely to move business away from U.S. CSEs and

U.S. Guaranteed CSEs in order to avoid being subject to margin

requirements); ISDA at 10 (dealing activities that would fall within

exemption may be an ``integral element'' of CSEs' global business).

\169\ See ABA/ABASA at 3; IIB/SIFMA at 12-13; ISDA at 10.

\170\ See IIB/SIFMA at 12 (arguing that de minimis nature of

exemption ensures that nexus of swap activity to the United States

is not ``significant'').

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b. Final Rule

The Commission is adopting a special provision for swaps with

counterparties in foreign jurisdictions where limitations in the legal

or operational infrastructure of the jurisdiction make it impracticable

for the CSE and its counterparty to comply with the custodial

arrangement requirements in the Final Margin Rule (``non-segregation

jurisdictions'').\171\ The Commission understands that CSEs may

transact swaps with counterparties located in foreign jurisdictions

that do not have legal or operational infrastructures to support

custodial arrangements required under the Final Margin Rule.\172\ In

the face of these legal and operational impediments, FCSs and foreign

branches of U.S. CSEs would be forced to discontinue their swaps

business with clients located in these jurisdictions. Taking these

factors into consideration, the Commission has determined to include a

special provision to accommodate this unique circumstance. The

Commission notes that the Prudential Regulators adopted a similar

provision in their final margin rules.

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\171\ For convenience, the term ``non-segregation jurisdiction''

is used in the preamble of this release.

\172\ The Final Margin Rule addresses the manner in which the

margin collected or posted by a CSE must be held and requires, among

other things, that the CSE must have a custodial agreement

prohibiting rehypothecation or otherwise transfer the initial margin

held by the custodian. See 17 CFR 23.157. The custodial requirements

are critical to ensuring the proper segregation and protection of

CSE funds.

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Under section 23.160(e) of the Final Rule, an FCS or a foreign

branch of a U.S. CSE would be eligible to engage in

[[Page 34833]]

uncleared swaps with certain non-U.S. counterparties in non-segregation

jurisdictions, without complying with either the requirement to post

initial margin \173\ or the custodial arrangement requirements that

pertain to initial margin collected by a CSE under the Final Margin

Rule,\174\ subject to certain conditions.\175\ This special provision

reflects the Commission's recognition that CSEs would otherwise be

precluded from engaging in any uncleared swaps in these foreign

jurisdictions as they cannot satisfy the custodial requirements of the

Final Margin Rule. The Commission clarifies that the special provision

for non-segregation jurisdictions only provides relief from the

specified requirements; all other margin rules in part 23 of the

Commission's regulations (with the exception of the special provision

for non-netting jurisdictions) would continue to apply.\176\

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\173\ See 17 CFR 23.152(b).

\174\ See 17 CFR 23.157(b). The Commission notes that with

respect to initial margin collected by a qualifying CSE in a non-

segregation jurisdiction in reliance on Sec. 23.160(e), Sec.

23.157(c) also would not apply to initial margin that is collected

by the CSE. Section 23.157(c) requires a CSE to enter a custodial

agreement meeting specified requirements with respect to any funds

that the CSE holds (i.e., initial margin posted or collected by the

CSE). Because CSEs that rely on Sec. 23.160(e) are not required to

hold collateral in accordance with Sec. 23.157(b) for initial

margin that they collect, they also would not be required to comply

with Sec. 23.157(c) with respect to initial margin that they

collect.

\175\ This provision only provides relief from the custodial

requirement for collection of initial margin in Sec. 23.157(b).

Accordingly, FCSs and foreign branches of U.S. CSEs remain subject

to the requirements of Sec. 23.157(a) and (c) of the Final Margin

Rule with respect to initial margin that is posted in a non-

segregation jurisdiction (which the CSE would be unable to comply

with in a non-segregation jurisdiction).

\176\ If the special provision for non-segregation jurisdictions

is available, then the special provision for non-netting

jurisdictions (discussed in the next section) would not be available

even if the relevant foreign jurisdiction is also a ``non-netting

jurisdiction.'' As explained in supra note 174, because CSEs that

rely on Sec. 23.160(e) are not required to hold collateral in

accordance with Sec. 23.157(b) for initial margin that they

collect, they would not be required to comply with Sec. 23.157(c)

with respect to initial margin that they collect.

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This provision is narrowly tailored to limit its availability to

FCSs (and foreign branches of U.S. CSEs) in foreign jurisdictions where

compliance with the Final Margin Rule's custodial requirements is

effectively precluded due to impediments inherent in the relevant

foreign jurisdiction.\177\ In addition, this provision is only

available in such jurisdictions if the following conditions are

satisfied. First, the CSE's counterparty must be a non-U.S. person that

is not a CSE, and the counterparty's obligations under the swap must

not be guaranteed by a U.S. person.\178\ Second, the CSE must collect

initial margin in cash on a gross basis, and post and collect variation

margin in cash, in accordance with the Final Margin Rule.\179\ The

collection of margin on a gross basis ensures that the CSE has adequate

collateral in the event of a counterparty or custodial default;

similarly, not requiring the CSE to post initial margin minimizes the

amount of collateral that may not be recovered if the CSE's

counterparty defaults. Third, for each broad risk category set out in

section 23.154(b)(2)(v) of the Final Margin Rule,\180\ the total

outstanding notional value of all uncleared swaps in that broad risk

category, as to which the CSE is relying on section 23.160(e), may not

exceed 5 percent of the CSE's total outstanding notional value for all

uncleared swaps in the same broad risk category. Accordingly, a 5

percent limit applies to each of the four broad risk categories set

forth in section 23.154(b)(2)(v): Credit, equity, foreign exchange and

interest rates (considered together as a single asset class), and

commodities. Fourth, the CSE must have policies and procedures ensuring

that it is in compliance with all of the requirements of this

exception. Fifth, the CSE must maintain books and records properly

documenting that all of the requirements of this exception are

satisfied.\181\

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\177\ The special provision applies where inherent limitations

in the legal or operational infrastructure in the applicable foreign

jurisdiction make it impracticable for the FCS (or foreign branch of

a U.S. CSE) and its counterparty to post initial margin in

compliance with the custodial requirements of Sec. 23.157 of the

Final Margin Rule. The special provision does not apply if the CSE

that is subject to the foreign regulatory restrictions is permitted

to post collateral for the uncleared swap in compliance with the

custodial arrangements of Sec. 23.157 in the United States or a

jurisdiction for which the Commission has issued a comparability

determination with respect to Sec. 23.157. See 17 CFR 23.160(e)(1)

and (2).

\178\ The Commission would expect the CSE's counterparty to be a

local financial end user that is required to comply with the foreign

jurisdiction's laws and that is prevented by regulatory restrictions

in the foreign jurisdiction from posting collateral for the

uncleared swap in compliance with the custodial arrangements of

Sec. 23.157 in the United States or a jurisdiction for which the

Commission has issued a comparability determination under the Final

Rule, even using an affiliate.

\179\ The CSE must collect initial margin in accordance with

Sec. 23.152(a) on a gross basis, in the form of cash pursuant to

Sec. 23.156(a)(1)(i) and post and collect variation margin in

accordance with Sec. 23.153(a) in the form of cash pursuant to

Sec. 23.156(a)(1)(i). See Sec. 23.160(e)(4) of the Final Rule.

\180\ Section 23.154(b)(2)(v) of the Final Margin Rule permits a

CSE to use an internal initial margin model that reflects offsetting

exposures, diversification, and other hedging benefits within four

broad risk categories: Credit, equity, foreign exchange and interest

rates (considered together as a single asset class), and commodities

when calculating initial margin for a particular counterparty if the

uncleared swaps are executed under the same ``eligible master

netting agreement.'' See 17 CFR 23.154(b)(2)(v).

\181\ See 17 CFR 23.160(e).

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In adopting this provision, the Commission considered the various

alternatives endorsed by commenters, including the adoption of a

blanket exclusion, subject to a transactional volume limit (e.g., using

a 5 percent limit patterned after a limited exclusion for certain

jurisdictions in the Guidance, as discussed in section II.B.4.a.

above). However, given the importance of the Final Margin Rule's

requirements to the protection of CSEs and the broader financial

system, and the potential for a blanket exclusion to incentivize market

participants to structure their swap business solely to avoid

application of the Commission's margin requirements, the Commission

believes that a more targeted approach that provides relief from only

from the requirement to post initial margin and the custodial

arrangement requirements that pertain to initial margin collected by a

CSE, as described above, is appropriate. While the Commission believes

that the relief provided by the special provision is appropriate

because FCSs and foreign branches of U.S. CSEs would otherwise be

effectively precluded from entering swaps in non-segregation

jurisdictions, the Commission also believes that, in order to protect

the safety and soundness of FCSs and foreign branches of U.S. CSEs

relying on the special provision, the exception from the specified

requirements is appropriately limited, as these CSEs are integral to

the stability of the U.S. financial system.

Therefore, rather than provide an exception from all of the

Commission's margin requirements to CSEs that engage in swaps

activities in non-segregation jurisdictions up to a 5% limit, as

suggested by some commenters, the special provision only excepts

qualifying FCSs and foreign branches of U.S. CSEs from certain

specified requirements, subject to specified conditions (including a 5

percent limit in each of four broad risk categories set forth in Sec.

23.154(b)(2)(v)), as described above. The Commission believes that

imposing a 5 percent limit in each of the four broad risk categories

set out in Sec. 23.154(b)(2)(v) is necessary because the FCS (or

foreign branch of a U.S. CSE) may have a large notional amount

outstanding in the foreign exchange and interest rate category (which

is considered together as a single class) which would effectively

eviscerate any limit in other lower notional risk categories.

The Commission believes that the total outstanding notional value

of all

[[Page 34834]]

uncleared swaps as to which an FCS relies on Sec. 23.160(e) should not

exceed 5 percent of the FCS's total outstanding notional amount of

uncleared swaps (in each of the four broad risk categories), rather

than the total notional outstanding amount of uncleared swaps of its

ultimate parent entity. Using the ultimate parent entity's swap

activity as the basis for the formula could allow the FCS to engage in

significant levels of swap activity in non-segregation jurisdictions

based on swap activities of its affiliates, rendering the 5 percent

limit meaningless. In addition, as an FCS is a registered CSE, its swap

activities with U.S. persons were sufficient to require its

registration in the United States, and therefore its swap activity in

the non-segregation jurisdiction would never account for all of the

CSE's swap dealing activity.

5. Special Provision for Non-Netting Jurisdictions

a. Comments

Commenters generally agreed that, at a minimum, the Commission

should provide an exception for swaps with counterparties located in

jurisdictions in which netting, collateral or third party custodial

arrangements may not be legally effective, including in a

counterparty's insolvency.\182\ ISDA and JBA proposed that an exception

for non-netting jurisdictions should apply up to 5 percent of the

aggregate notional amount of a CSE's uncleared swaps.\183\ They argued

that, without enforceable netting and collateral arrangements, a

bankruptcy administrator could ``cherry pick'' when determining the

return of posted collateral in the event of insolvency.\184\ ISDA

further argued that imposing margin in such cases could severely limit

swaps activity in non-netting jurisdictions and cause significant

disruptions in financial markets.\185\

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\182\ See ABA/ABASA at 5 n.14; IIB/SIFMA at 13 n.44; ISDA at 10

(requesting an exemption for jurisdictions where getting a ``clean''

netting or collateral opinion is ``not possible''); JBA at 10.

\183\ See ISDA at 10; JBA at 10.

\184\ See ISDA at 10 (further arguing that a CSE may not be able

to effectively foreclose on margin in event of a counterparty

default); JBA at 10.

\185\ See ISDA at 10.

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ISDA and JBA further recommended that, absent an exception for non-

netting jurisdictions, CSEs should have at least some exception from

the requirement to collect or post margin.\186\ According to ISDA,

without such an exception, a CSE could be prevented from applying

collateral to the obligations of the counterparty and face difficulties

in recovering it.\187\ ISDA argued that posting margin could therefore

increase risk to the CSE, while an exception could bypass segregation

problems in the non-netting jurisdiction.\188\

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\186\ See ISDA at 10-11 (requesting exemption from requirement

to post initial margin); JBA at 10 (requesting exemption from both

initial and variation margin requirements because, under such

conditions, amount of variation margin to be posted or collected

cannot be fixed).

\187\ See ISDA at 11.

\188\ See id.

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b. Final Rule

The Commission is adopting a special provision, also included in

the Prudential Regulators' Final Margin Rule, for non-netting

jurisdictions.\189\ Under the Final Rule, a CSE that cannot conclude,

with a well-founded basis, that the netting agreement with a

counterparty in a foreign jurisdiction meets the definition of an

``eligible master netting agreement'' set forth in the Final Margin

Rule may nevertheless net uncleared swaps in determining the amount of

margin that it posts, provided that certain conditions are met.\190\ In

order to avail itself of this special provision, the CSE must treat the

uncleared swaps covered by the agreement on a gross basis in

determining the amount of initial and variation margin that it must

collect, but may net those uncleared swaps in determining the amount of

initial and variation margin it must post to the counterparty, in

accordance with the netting provisions of the Final Margin Rule.\191\

Requiring CSEs to calculate and collect initial margin on a gross basis

is intended to ensure that the CSE can obtain the collateral posted

with the counterparty in the event of counterparty default. As with the

special provision for non-segregation jurisdictions in section

23.160(e) of the Final Rule, this provision is carefully tailored to

allow CSEs to enter into uncleared swaps in ``non-netting''

jurisdictions but without abandoning the key protections behind the

netting requirement under the Final Margin Rule. A CSE that enters into

uncleared swaps in ``non-netting'' jurisdictions in reliance on this

provision must have policies and procedures ensuring that it is in

compliance with the special provision's requirements, and maintain

books and records properly documenting that all of the requirements of

this exception are satisfied.\192\

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\189\ As used in this release, a ``non-netting jurisdiction'' is

a jurisdiction in which a CSE cannot conclude, with a well-founded

basis, that the netting agreement with a counterparty in that

foreign jurisdiction meets the definition of an ``eligible master

netting agreement'' set forth in the Final Margin Rule. See 17 CFR

23.151.

\190\ The Final Margin Rule permits offsets in relation to

either initial margin or variation margin calculation when (among

other things), the offsets related to swaps are subject to the same

eligible master netting agreement. This ensures that CSEs can

effectively foreclose on the margin in the event of a counterparty

default, and avoids the risk that the administrator of an insolvent

counterparty will ``cherry-pick'' from posted collateral to be

returned.

\191\ As noted above, in the event that the special provision

for non-segregation jurisdictions applies to a CSE, then the special

provision for non-netting jurisdictions would not apply to the CSE

even if the relevant jurisdiction is also a ``non-netting

jurisdiction.'' In this circumstance, the CSE must collect the gross

amount of initial margin in cash (but would not be required to post

initial margin), and post and collect variation margin in cash in

accordance with the requirements of the special provision for non-

segregation jurisdictions, as discussed in section II.B.4.b.

\192\ See Sec. 23.160(d) of the Final Rule.

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The Commission considered ISDA's request that it adopt a blanket

exclusion, subject to a percentage limitation based on the level of

swap activity. However, the Commission believes that a blanket

exclusion, even with a transactional limit, presents a significant risk

that the safety and soundness of a CSE engaged in swaps in non-netting

jurisdictions would be insufficiently protected because, without the

collection of sufficient margin, the CSE could be unduly exposed to

counterparty default. The Commission also considered, but determined to

not adopt, ISDA's request that posting to counterparties in non-netting

jurisdictions not be required.\193\ Because the posting requirement

serves to limit the ability of a CSE to assume excessive risk, the

Commission believes that CSEs should be required to post margin in

order to advance the objectives of the margin mandate.

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\193\ The Commission agrees with commenters that without

enforceable netting and collateral arrangements, there is a risk

that the administrator of an insolvent counterparty will ``cherry-

pick'' from posted collateral to be returned in the event of

insolvency. This would result in an increase in the risk in posting

collateral, because a CSE may not be able to effectively foreclose

on the margin in the event its counterparty defaults.

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C. Comparability Determinations

As discussed above, consistent with CEA section 2(i) and comity

principles, the Final Rule permits eligible CSEs to rely on substituted

compliance to the extent that the Commission determines the relevant

foreign jurisdiction's margin requirements are comparable to the

Commission's. Specifically, the Final Rule outlines a framework for the

Commission's comparability determinations, including eligibility and

submission requirements for requesters and the Commission's standard of

review for making comparability determinations.\194\

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\194\ See 17 CFR 23.160(c).

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[[Page 34835]]

1. Proposed Rule

As proposed, section 23.160(c) established a process for requesting

comparability determinations. Specifically, the proposed rule

identified persons eligible to request a comparability determination

(CSEs eligible to rely on substituted compliance and any relevant

foreign regulatory authorities) and the information and documentation

they should provide the Commission, including how the relevant foreign

jurisdiction's margin requirements address the various elements of the

Commission's margin regime (e.g., the products and entities subject to

margin requirements).

The proposed rule also identified several factors the Commission

would consider in making a comparability determination, such as how the

relevant foreign margin requirements compare to International Standards

\195\ and whether they achieve comparable outcomes to the Commission's

requirements. The Commission explained that its analysis would follow

an outcome-based approach, one that would focus on evaluating the

outcomes and objectives of the foreign margin requirements and not

require them to be identical to the Commission's margin

requirements.\196\ The Commission further explained that it would

review a foreign margin regime's comparability on an element-by-element

basis, such that a foreign jurisdiction's margin requirements could be

deemed comparable with respect to some elements of the Commission's

margin requirements and not others.\197\ The Commission made clear,

however, that consistent with its outcome-based approach, a

comparability determination could be appropriate even if the foreign

jurisdiction approaches an element differently.\198\

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\195\ See proposed 17 CFR 23.160(a)(3) (defining ``International

Standards'' as based on the BCBS-IOSCO framework).

\196\ See Proposal, 80 FR at 41389.

\197\ See id.

\198\ See id. (``[T]he Commission would evaluate whether a

foreign jurisdiction has rules and regulations that achieve

comparable outcomes. If it does, the Commission believes that a

comparability determination may be appropriate, even if there may be

differences in the specific elements of a particular regulatory

provision.'').

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The proposed rule concluded by explaining the regulatory effect of

complying with a foreign jurisdiction's margin requirements in reliance

on a comparability determination, such that a violation of a foreign

margin requirement could constitute a violation of the Commission's

corresponding requirement. It also codified the Commission's authority

to condition or otherwise modify any comparability determination it

issues.

The Commission requested comment on all aspects of proposed Sec.

23.160(c).\199\

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\199\ The Commission also requested comment on the scope of the

Commission's proposed substituted compliance regime, whether the

Commission should develop an interim process for comparability

determinations that would take into account differing implementation

timeliness for margin rules by other foreign jurisdictions, and the

need for an emerging markets exception. Comments received in

response to these questions were addressed above.

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2. Comments

Commenters generally focused on the Commission's proposed approach

to evaluating the comparability of a foreign jurisdiction's margin

regime.\200\ Commenters supported an approach that would focus on the

regulatory objectives and outcomes of the relevant margin regimes and

not require uniformity with the Commission's rule provisions.\201\ JBA,

for instance, urged the Commission not to deny a comparability

determination because a Commission rule is ``stricter,'' but to focus

on whether the substance of the foreign jurisdiction's rules

effectively achieves the objective of mitigating risk.\202\

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\200\ See proposed 17 CFR 23.160(c)(2)-(3); Proposal, 80 FR at

41389-90.

\201\ See, e.g., AIMA/IA at 3-4 (absent ``automatic substituted

compliance'' for any transaction involving an entity from a

jurisdiction that participated in the WGMR, Commission should make

comparability determinations based ``on broad comparability of

requirements rather than detailed correspondence of rules''); ICI

Global at 9-10; IIB/SIFMA at 3; ISDA at 7; JBA at 9; Vanguard at 3.

\202\ See JBA at 9 (for example, while Commission's proposed

margin rule with respect to eligible collateral for variation margin

was narrower in scope than rule proposed by European or Japanese

authorities, foreign regulations are not necessarily less effective

from a risk mitigation perspective).

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Commenters expressed concern, however, that the Commission's

proposed approach was overly complicated and would undermine an

outcome-based approach.\203\ IIB/SIFMA described the Commission's

proposed approach as too ``granular,'' requiring ``consistency at a

level of detail that ignores the overall risk mitigating impact'' of a

foreign jurisdiction's margin regime.\204\ IIB/SIFMA suggested that the

``test for comparability'' should be ``whether differences between the

regimes would, in the aggregate, create a significant and unacceptable

level of risk to CSEs or the U.S. financial system.'' \205\

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\203\ See, e.g., ICI Global at 10 (proposed approach to

determining comparability is ``unnecessarily complicated'' and

effectively requires comparability with respect to ``each particular

aspect'' of the foreign jurisdiction's margin regime); ISDA at 7

(``complexity and specificity'' of Commission's proposed approach is

``not consistent with a general outcome-based approach'').

\204\ See IIB/SIFMA at 9 (element-by-element approach would

result in ``stricter-rule-applies'' approach).

\205\ See id. at 10 (margin regimes that comply with

International Standards would likely satisfy such a test).

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Commenters also expressed concern that issuing comparability

determinations with respect to some but not all of a foreign

jurisdiction's margin requirements would be challenging and costly to

implement.\206\ As a result, market participants would either default

to the Commission's margin requirements, undercutting the benefits of

substituted compliance,\207\ or modify their cross-border activities to

avoid Commission regulation, increasing market fragmentation.\208\ ISDA

further argued that an element-by-element approach would be

inconsistent with the goals of the BCBS-IOSCO framework to avoid

``duplicative or conflicting margin requirements'' and ensuring

``substantial certainty'' as to which country's margin rules

apply.\209\ Commenters urged the Commission to evaluate and issue a

comparability determination for a foreign jurisdiction's margin regime

as a whole.\210\

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\206\ See, e.g., PensionsEurope at 2 (there are ``some

benefits'' to an element-by-element approach but, by creating

potential for partial comparability determinations, proposed rule

would add ``a significant amount of complexity'' and ``likely create

more problems than it solves''); SIFMA AMG at 8 (``the potential for

piecemeal comparability determinations'' would lead to

``uncertainty, compliance difficulties and the potential for margin

disputes''); Vanguard at 4-5 (market participants would be required

to develop and implement a new system designed to apply the

Commission's comparability determinations and ensure simultaneous

compliance with two sets of rules).

\207\ See, e.g., ICI Global at 10; IIB/SIFMA at 9; SIFMA at 8

(Commission's prior issuance of partial comparability determinations

with respect to swap trading relationship documentation led to

confusion and disagreements regarding which rule sections may be

complied with via substituted compliance).

\208\ See IIB/SIFMA at 9; SIFMA AMG at 7.

\209\ See ISDA at 8 (highlighting background discussion of

element 7 of the BCBS-IOSCO framework (interaction of national

regimes in cross-border transactions), which encourages cooperation

among regulatory regimes to produce ``sufficiently consistent and

non-duplicative'' margin requirements).

\210\ See, e.g., ICI Global at 2, 10 (Commission should

``consider [] the margin rules of a jurisdiction in their entirety''

and not ``mak[e] determinations for each element of the margin

rules''); IIB/SIFMA at 9-10; SIFMA AMG at 8; Vanguard at 4-5.

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A majority of commenters also encouraged the Commission to make

consistency with the BCBS-IOSCO framework the primary focus of its

comparability determinations.\211\ FSR

[[Page 34836]]

suggested that the Commission ignore whether the foreign margin

requirements achieve comparable outcomes to the Commission's margin

requirements \212\ and make consistency with International Standards

the sole basis of its analysis.\213\ FSR argued that the ``purpose and

driving force'' of the BCBS-IOSCO framework was to create a ``uniform

global standard'' and that the Commission would undermine that goal if

it were to deny a comparability determination when the foreign margin

regime conforms to International Standards.\214\ Thus, FSR recommended

that the Commission issue a comparability determination to any regime

that complies with the International Standards despite any divergence

from the Commission's rules.\215\ IIB/SIFMA argued that margin regimes

that adhere to the BCBS-IOSCO framework are ``highly unlikely'' to

demonstrate ``material differences'' in the degree to which they reduce

aggregate risk,\216\ adding that issuing comparability determinations

based on consistency with the BCBS-IOSCO framework would further the

goal of international harmonization promoted by BCBS-IOSCO and

Congress.\217\

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\211\ See, e.g., AIMA/IA at 3; FSR at 2-5; ISDA at 7; SIFMA AMG

at 8; Vanguard at 5.

\212\ See proposed 17 CFR 23.160(c)(3)(iii).

\213\ See FSR at 5-6.

\214\ See id. at 3-4 (pointing to differences in the approaches

proposed by the European Market Infrastructure Regulation and the

Commission with regard to certain topics (e.g., eligible collateral

for variation margin) and expressing concern that, under the

Proposal, the Commission would reject comparability even though both

proposed approaches are consistent with BCBS-IOSCO framework).

\215\ See id. at 3. See also Vanguard at 5 (``unique local legal

or market structure issues'' may render certain individual elements

of a foreign jurisdiction's margin regime not comparable to

Commission's margin rules but foreign regime's ``overall outcome''

may nevertheless be consistent with BCBS-IOSCO framework).

\216\ See id. at 2 (BCBS-IOSCO framework-compliant regimes would

impose ``full, daily variation margin requirements and stringent

initial margin requirements'').

\217\ See id. at 3 (citing Dodd-Frank section 752(a)). See also

SIFMA AMG 7.

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AFR, on the other hand, argued that foreign margin rules should not

qualify for substituted compliance on the basis that they follow

International Standards alone.\218\ AFR stated that the Commission's

proposed margin rules evidenced ``a number of important differences''

from the BCBS-IOSCO framework and that, given the broad availability of

substituted compliance in the proposed rule, issuing comparability

determinations solely on the basis of consistency with International

Standards could lead to ``excessive opportunities for substituted

compliance.'' \219\

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\218\ See AFR at 7.

\219\ See id. See also IATP at 4 (provide appendix illustrating

``comparable and quantitative outcomes of swaps margining in other

jurisdictions with those under Commission authority, once margining

requirements and margin calculation methodology are agreed in those

jurisdictions'').

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3. Final Rule

After a careful review of the comments, the Commission is adopting

Sec. 23.160(c) as proposed, but is providing some additional

clarifications in response to commenters. The rule begins by

identifying persons eligible to request a comparability determination

with respect to the Commission's margin requirements, including any CSE

that is eligible for substituted compliance under rule Sec. 23.160

\220\ and any foreign regulatory authority that has direct supervisory

authority over one or more CSEs and that is responsible for

administering the relevant foreign jurisdiction's margin

requirements.\221\ Eligible persons may request a comparability

determination individually or collectively and with respect to some or

all of the Commission's margin requirements. Eligible CSEs may wish to

coordinate with their home regulators and other CSEs in order to

simplify and streamline the process. The Commission will make

comparability determinations on a jurisdiction-by-jurisdiction basis.

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\220\ See 17 CFR 23.160(c)(1)(i).

\221\ See 17 CFR 23.160(c)(1)(ii).

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Persons requesting comparability determinations should provide the

Commission with certain documents and information in support of their

request. Notably, the Final Rule provides that requesters should

provide copies of the relevant foreign jurisdiction's margin

requirements \222\ and descriptions of their objectives,\223\ how they

differ from the International Standards,\224\ and how they address the

elements of the Commission's margin requirements.\225\ With regard to

how the foreign margin requirements address the elements of the

Commission's margin requirements, the description should identify the

specific legal and regulatory provisions that correspond to each

element and, if necessary, whether the relevant foreign jurisdiction's

margin requirements do not address a particular element.\226\

Requesters should also provide a description of the ability of the

relevant foreign regulatory authority or authorities to supervise and

enforce compliance with the relevant foreign jurisdiction's margin

requirements \227\ and any other information and documentation the

Commission deems appropriate.\228\

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\222\ See 17 CFR 23.160(c)(2)(v).

\223\ See 17 CFR 23.160(c)(2)(i).

\224\ See 17 CFR 23.160(c)(2)(iii). See also 17 CFR 23.160(a)(3)

(defining ``International Standards'' as based on the BCBS-IOSCO

framework).

\225\ See 17 CFR 23.160(c)(2)(ii) (identifying the elements as:

(A) The products subject to the foreign jurisdiction's margin

requirements; (B) the entities subject to the foreign jurisdiction's

margin requirements; (C) the treatment of inter-affiliate derivative

transactions; (D) the methodologies for calculating the amounts of

initial and variation margin; (E) the process and standards for

approving models for calculating initial and variation margin

models; (F) the timing and manner in which initial and variation

margin must be collected and/or paid; (G) any threshold levels or

amounts; (H) risk management controls for the calculation of initial

and variation margin; (I) eligible collateral for initial and

variation margin; (J) the requirements of custodial arrangements,

including segregation of margin and rehypothecation; (K) margin

documentation requirements; and (L) the cross-border application of

the foreign jurisdiction's margin regime). Section 23.160(c)(2)(ii)

largely tracks the elements of the BCBS-IOSCO framework, but breaks

them down into their components as appropriate to ensure ease of

application.

\226\ See id.

\227\ See 17 CFR 23.160(c)(2)(iv) (requesting that such

description discuss the powers of the foreign regulatory authority

or authorities to supervise, investigate, and discipline entities

for compliance with the margin requirements and the ongoing efforts

of the regulatory authority or authorities to detect and deter

violations of the margin requirements).

\228\ See 17 CFR 23.160(c)(2)(vi). See also 17 CFR 23.160(c)(7)

(delegating authority to request additional information and/or

documentation to the Director of the Division of Swap Dealer and

Intermediary Oversight, or such other employee or employees as the

Director may designate from time to time).

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The Final Rule identifies certain key factors that the Commission

will consider in making a comparability determination. Specifically,

the Commission will consider the scope and objectives of the relevant

foreign jurisdiction's margin requirements; \229\ whether the relevant

foreign jurisdiction's margin requirements achieve comparable outcomes

to the Commission's corresponding margin requirements; \230\ and the

ability of the relevant regulatory authority or authorities to

supervise and enforce compliance with the relevant foreign

jurisdiction's margin requirements.\231\

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\229\ See 17 CFR 23.160(c)(3)(i). See also 17 CFR 23.160(a)(3)

(defining ``International Standards'' as based on the BCBS-IOSCO

framework).

\230\ See proposed 17 CFR 23.160(c)(3)(ii). As discussed above,

the Commission's Final Margin Rule is based on the International

Standards; therefore, the Commission expects that the relevant

foreign margin requirements would conform to the International

Standards at minimum in order to be deemed comparable to the

Commission's corresponding margin requirements.

\231\ See 17 CFR 23.160(c)(3)(iii). See also supra note 227; 17

CFR 23.160(c)(3)(iv) (indicating the Commission would also consider

any other relevant facts and circumstances).

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As indicated in the proposed rule, the Final Rule reflects an

outcome-based approach to assessing the comparability of a foreign

jurisdiction's margin

[[Page 34837]]

requirements. Instead of demanding strict uniformity with the

Commission's margin requirements, the Commission will evaluate the

objectives and outcomes of the foreign margin requirements in light of

foreign regulator(s)' supervisory and enforcement authority.

Recognizing that jurisdictions may adopt different approaches to

achieving the same outcome, the Commission will focus on whether the

foreign jurisdiction's margin requirements are comparable to the

Commission's in purpose and effect, not whether they are comparable in

every aspect or contain identical elements.

As commenters noted, the Commission was actively involved in

developing the BCBS-IOSCO framework, and the Commission believes that

the minimum standards it establishes are consistent with the objectives

of the Commission's own margin requirements. However, while the BCBS-

IOSCO framework establishes minimum standards that are consistent with

the objectives of the Commission's own margin requirements, the

Commission notes that just because a foreign jurisdiction's margin

requirements are consistent with International Standards does not

necessarily mean that they will be comparable to the Commission's

requirements.\232\ Consequently, in the Commission's view, consistency

with International Standards is necessary but may not be sufficient to

finding comparability.\233\

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\232\ The BCBS-IOSCO framework leaves certain elements open to

interpretation (e.g., the definition of ``derivative'') and

expressly invites regulators to build on certain principles as

appropriate. See, e.g., Element 4 (eligible collateral) (national

regulators should ``develop their own list of eligible collateral

assets based on the key principle, taking into account the

conditions of their own markets''); Element 5 (initial margin) (the

degree to which margin should be protected would be affected by

``the local bankruptcy regime, and would vary across

jurisdictions''); Element 6 (transactions with affiliates)

(``Transactions between a firm and its affiliates should be subject

to appropriate regulation in a manner consistent with each

jurisdiction's legal and regulatory framework.'').

\233\ As the Commission noted above, the Final Margin Rule

included substantial modifications from the Proposed Margin Rule

that further aligned the Commission's margin requirements with

International Standards and, as a result, the potential for conflict

with foreign margin requirements should be reduced. See supra note

29. The Commission further notes that whether a particular margin

requirement in a foreign jurisdiction is comparable to the

Commission's corresponding requirement entails a fact-specific

analysis.

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As stated in the proposed rule, the Commission will review the

foreign margin requirements on an element-by-element basis.\234\ Margin

regimes are complex structures made up of a number of interrelated

components, and differences in how jurisdictions approach and assemble

those components are inevitable, even among jurisdictions that base

their margin requirements on the principles and requirements set forth

in the BCBS-IOSCO framework. In order to arrive at a meaningful and

complete comparability determination, the Commission must therefore

engage in a fact-specific analysis to develop a clear understanding of

the elements of the foreign margin regime and how they interact. The

Commission believes this level of review will support its outcome-based

approach by aiding its assessment of whether such differences affect

comparability.

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\234\ See 17 CFR 23.160(c)(2) (specifying that persons

requesting comparability determinations should provide the

Commission with documentation and information relating to each

element of the Commission's margin requirements).

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As indicated in the proposed rule, the Commission is allowing for

the possibility that a comparability determination may not include all

elements of a foreign jurisdiction's margin regime.\235\ The Commission

believes that this position is preferable to an all-or-nothing

approach, in which the Commission would be unable to make a

comparability determination for an entire jurisdiction if one or more

aspects of the foreign jurisdiction's margin regime results in an

outcome that is critically different from that of the Commission's.

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\235\ For example, the Commission may determine that a foreign

jurisdiction's margin regime is comparable with respect to its

variation margin requirements but not with respect to custodial

arrangements, including segregation and rehypothecation

requirements.

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The Final Rule provides that any CSE that, in accordance with a

comparability determination, complies with a foreign jurisdiction's

margin requirements will be deemed in compliance with the Commission's

corresponding margin requirements.\236\ Accordingly, if the Commission

determines that a CSE has failed to comply with the relevant foreign

margin requirements, it could initiate an action for a violation of the

Commission's margin requirements. In addition, all CSEs remain subject

to the Commission's examination and enforcement authority regardless of

whether they rely on a comparability determination. Although the Final

Rule does not obligate the Commission to consult with or rely on the

advice of the foreign regulatory authority in making its determination

regarding whether a violation of foreign margin requirements has

occurred, the Commission notes that Commission staff may consult with

the relevant foreign regulatory authority to assist the Commission in

making its determination.

---------------------------------------------------------------------------

\236\ See 17 CFR 23.160(c)(4).

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The Final Rule concludes by codifying the Commission's authority to

impose any terms and conditions it deems appropriate in issuing a

comparability determination,\237\ and to further condition, modify,

suspend, terminate or otherwise restrict any comparability

determination it has issued in its discretion.\238\

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\237\ See 17 CFR 23.160(c)(5).

\238\ See 17 CFR 23.160(c)(6). For instance, a comparability

determination may require modification or termination if a key basis

for the determination ceases to be true.

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Comparability determinations issued by the Commission will require

that the Commission be notified of any material changes to information

submitted in support of a comparability determination, including, but

not limited to, changes in the relevant foreign jurisdiction's

supervisory or regulatory regime. The Commission also expects that the

relevant foreign regulator will enter into, or will have entered into,

an appropriate memorandum of understanding (``MOU'') or similar

arrangement with the Commission in connection with a comparability

determination.\239\

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\239\ Under Commission regulations 23.203 and 23.606, registered

swap dealers and major swap participants must maintain all records

required by the CEA and the Commission's regulations in accordance

with Commission regulation 1.31 and keep them open for inspection by

representatives of the Commission, the United States Department of

Justice, or any applicable prudential regulator. See 17 CFR 23.203,

23.606. The Commission further expects that prompt access to books

and records and the ability to inspect and examine a non-U.S. CSE

will be a condition to any comparability determination.

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As stated above, the Commission recognizes that systemic risks

arising from the global and interconnected swap market must be

addressed through coordinated regulatory requirements for margin across

international jurisdictions. Accordingly, the Commission will continue

its practice of actively engaging market participants and consulting

closely with foreign regulators to encourage the international

harmonization and coordination of margin requirements for uncleared

swaps and to minimize market disruptions.

III. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (``RFA'') requires that agencies

consider whether the regulations they propose will have a significant

economic impact on a substantial number of small

[[Page 34838]]

entities.\240\ The Commission previously has established certain

definitions of ``small entities'' to be used in evaluating the impact

of its regulations on small entities in accordance with the RFA.\241\

The final regulation establishes a mechanism for CSEs \242\ to satisfy

margin requirements by complying with comparable margin requirements in

the relevant foreign jurisdiction as described in paragraph (c) of the

Final Rule,\243\ but only to the extent that the Commission makes a

determination that complying with the laws of such foreign jurisdiction

is comparable to complying with the corresponding margin requirement(s)

for which the determination is sought.

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\240\ 5 U.S.C. 601 et seq.

\241\ See 47 FR 18618 (Apr. 30, 1982) (finding that designated

contract markets, future commission merchants, commodity pool

operators and large traders are not small entities for RFA

purposes).

\242\ See 17 CFR 23.151 (defining ``CSE'' as a swap dealer or

major swap participant for which there is no Prudential Regulator).

\243\ See 17 CFR 23.160(c).

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The Commission previously has determined that swap dealers and

major swap participants are not small entities for purposes of the

RFA.\244\ Thus, the Commission is of the view that there will not be

any small entities directly impacted by this rule.

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\244\ See 77 FR 30596, 30701 (May 23, 2012); 77 FR 2613, 2620

(Jan. 19, 2012) (noting that like future commission merchants, swap

dealers will be subject to minimum capital requirements, and are

expected to be comprised of large firms, and that major swap

participants should not be considered to be small entities for

essentially the same reasons that it previously had determined large

traders not to be small entities).

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The Commission notes that under the Final Margin Rule, swap dealers

and major swap participants would only be required to collect and post

margin on uncleared swaps when the counterparties to the uncleared

swaps are either other swap dealers and major swap participants or

financial end users. As noted above, swap dealers and major swap

participants are not small entities for RFA purposes. Furthermore, any

financial end users that may be indirectly \245\ impacted by the Final

Rule would be similar to eligible contract participants (``ECPs''),

and, as such, they would not be small entities.\246\ Further, to the

extent that there are any foreign financial entities that would not be

considered ECPs, the Commission expects that there would not be a

substantial number of these entities significantly impacted by the

Final Rule. As noted above, most foreign financial entities would

likely be ECPs to the extent they would transact in uncleared swaps.

The Commission expects that only a small number of foreign financial

entities that are not ECPs, if any, would transact in uncleared swaps.

In addition, the material swaps exposure threshold for financial end

users in the Final Margin Rule reinforces the Commission's expectation

that only a small number of entities would be affected by the Final

Rule.

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\245\ The RFA focuses on direct impact to small entities and not

on indirect impacts on these businesses, which may be tenuous and

difficult to discern. See Mid-Tex Elec. Coop., Inc. v. FERC, 773

F.2d 327, 340 (D.C. Cir. 1985); Am. Trucking Assns. v. EPA, 175 F.3d

1027, 1043 (D.C. Cir. 1985).

\246\ As noted in paragraph (1)(xii) of the definition of

``financial end user'' in Sec. 23.151 of the Final Margin Rule, a

financial end user includes a person that would be a financial

entity described in paragraphs (1)(i)-(xi) of that definition, if it

were organized under the laws of the United States or any State

thereof. See 17 CFR 23.151. The Commission believes that this prong

of the definition of financial end user captures the same type of

U.S. financial end users that are ECPs, but for them being foreign

financial entities. Therefore, for purposes of the Commission's RFA

analysis, these foreign financial end users will be considered ECPs

and therefore, like ECPs in the U.S., not small entities.

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Accordingly, the Commission finds that there will not be a

substantial number of small entities impacted by the Final Rule.

Therefore, the Chairman, on behalf of the Commission, hereby certifies

pursuant to 5 U.S.C. 605(b) that the proposed regulations will not have

a significant economic impact on a substantial number of small

entities.

B. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (``PRA'') \247\ imposes certain

requirements on Federal agencies, including the Commission, in

connection with their conducting or sponsoring any collection of

information, as defined by the PRA. This final rulemaking will result

in the collection of information requirements within the meaning of the

PRA, as discussed below. Responses to these collections of information

will be required to obtain or retain benefits. An agency may not

conduct or sponsor, and a person is not required to respond to, a

collection of information unless it displays a currently valid control

number. One of the collections of information required by this final

rulemaking, which is described below under the heading ``Information

Collection--Comparability Determinations,'' was previously included in

the proposed rule and discussed in the Proposal. Accordingly, the

Commission requested from the Office of Management and Budget (``OMB'')

a control number for that information collection. OMB assigned OMB

control number 3038-0111. The title for this collection of information

is ``Margin Requirements for Uncleared Swaps for Swap Dealers and Major

Swap Participants; Comparability Determinations with Margin

Requirements.'' No comments were received on the paperwork burden

associated with this information collection request. In addition, this

final rulemaking includes two additional collections of information

that were not previously proposed, which are described below under the

headings ``Information Collection--Non-Segregation Jurisdictions'' and

``Information Collection--Non-Netting Jurisdictions,'' respectively.

Accordingly, the Commission, by separate notice published in the

Federal Register concurrently with this Final Rule, will request

approval by OMB of this new information collection under OMB Control

Number 3038-0111.

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\247\ 44 U.S.C. 3501 et seq.

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1. Information Collection--Comparability Determinations

Section 731 of the Dodd-Frank Act amended the CEA to add, as

section 4s(e) thereof, provisions concerning the setting of initial and

variation margin requirements for swap dealers and major swap

participants. Each swap dealer and major swap participant for which

there is a Prudential Regulator, as defined in section 1a(39) of the

CEA, must meet margin requirements established by the applicable

Prudential Regulator, and each CSE must comply with the Commission's

regulations governing margin. With regard to the cross-border

application of the swap provisions enacted by Title VII of the Dodd-

Frank Act, section 2(i) of the CEA provides the Commission with express

authority over activities outside the United States relating to swaps

when certain conditions are met. Section 2(i) of the CEA provides that

the CEA's provisions relating to swaps enacted by Title VII of the

Dodd-Frank Act (including Commission rules and regulations promulgated

thereunder) shall not apply to activities outside the United States

unless those activities (1) have a direct and significant connection

with activities in, or effect on, commerce of the United States or (2)

contravene such rules or regulations as the Commission may prescribe or

promulgate as are necessary or appropriate to prevent the evasion of

any provision of Title VII.\248\ Because margin requirements are

critical to ensuring the safety and soundness of a CSE and supporting

the stability of the U.S. financial markets, the Commission believes

that its margin rules should

[[Page 34839]]

apply on a cross-border basis in a manner that effectively addresses

risks to the registered CSE and the U.S. financial system.

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\248\ 7 U.S.C. 2(i).

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As noted above, the Final Rule establishes margin requirements for

uncleared swaps of CSEs, with substituted compliance available in

certain circumstances, except as to a narrow class of uncleared swaps

between a non-U.S. CSE and a non-U.S. counterparty that fall within the

Exclusion. The Final Rule also establishes a procedural framework in

which the Commission will consider permitting compliance with

comparable margin requirements in a foreign jurisdiction to substitute

for compliance with the Commission's margin requirements in certain

circumstances. The Commission will consider whether the requirements of

such foreign jurisdiction with respect to margin of uncleared swaps are

comparable to the Commission's margin requirements.

Specifically, the Final Rule provides that a CSE that is eligible

for substituted compliance may submit a request, individually or

collectively, for a comparability determination.\249\ Persons

requesting a comparability determination may coordinate their

application with other market participants and their home regulators to

simplify and streamline the process. Once a comparability determination

is made for a jurisdiction, it will apply for all entities or

transactions in that jurisdiction to the extent provided in the

determination, as approved by the Commission. In providing information

to the Commission for a comparability determination, applicants must

include, at a minimum, information describing any differences between

the relevant foreign jurisdiction's margin requirements and

International Standards,\250\ and the specific provisions of the

foreign jurisdiction that govern: (A) The products subject to the

foreign jurisdiction's margin requirements; (B) the entities subject to

the foreign jurisdiction's margin requirements; (C) the treatment of

inter-affiliate derivative transactions; (D) the methodologies for

calculating the amounts of initial and variation margin; (E) the

process and standards for approving models for calculating initial and

variation margin models; (F) the timing and manner in which initial and

variation margin must be collected and/or paid; (G) any threshold

levels or amounts; (H) risk management controls for the calculation of

initial and variation margin; (I) eligible collateral for initial and

variation margin; (J) the requirements of custodial arrangements,

including segregation of margin and rehypothecation; (K) margin

documentation requirements; and (L) the cross-border application of the

foreign jurisdiction's margin regime.\251\

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\249\ A CSE may apply for a comparability determination only if

the uncleared swap activities of the CSE are directly supervised by

the authorities administering the foreign regulatory framework for

uncleared swaps. Also, a foreign regulatory agency may make a

request for a comparability determination only if that agency has

direct supervisory authority to administer the foreign regulatory

framework for uncleared swaps in the requested foreign jurisdiction.

\250\ See 17 CFR 23.160(a)(3) (defining ``International

Standards'' as based on the BCBS-IOSCO framework).

\251\ See 17 CFR 23.160(c)(2)(ii).

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In addition, the Commission expects the applicant, at a minimum, to

describe how the foreign jurisdiction's margin requirements address

each of the above-referenced elements, and identify the specific legal

and regulatory provisions that correspond to each element (and, if

necessary, whether the relevant foreign jurisdiction's margin

requirements do not address a particular element). Further, the

applicant must describe the objectives of the foreign jurisdiction's

margin requirements, the ability of the relevant regulatory authority

or authorities to supervise and enforce compliance with the foreign

jurisdiction's margin requirements, including the powers of the foreign

regulatory authority or authorities to supervise, investigate, and

discipline entities for noncompliance with the margin requirements and

the ongoing efforts of the regulatory authority or authorities to

detect and deter violations of the margin requirements. Finally, the

applicant must furnish copies of the foreign jurisdiction's margin

requirements (including an English translation of any foreign language

document) and any other information and documentation that the

Commission deems appropriate.\252\

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\252\ See 17 CFR 23.160(c)(2)(v) and (vi).

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In issuing a comparability determination, the Commission may impose

any terms and conditions it deems appropriate. In addition, the Final

Rule will provide that the Commission may, on its own initiative,

further condition, modify, suspend, terminate, or otherwise restrict a

comparability determination in the Commission's discretion. This could

result, for example, from a situation where, after the Commission

issues a comparability determination, the basis of that determination

ceases to be true. In this regard, the Commission will require an

applicant to notify the Commission of any material changes to

information submitted in support of a comparability determination

(including, but not limited to, changes in the foreign jurisdiction's

supervisory or regulatory regime) as the Commission's comparability

determination may no longer be valid.\253\

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\253\ The Commission expects to impose this obligation as one of

the conditions to the issuance of a comparability determination.

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The collection of information that is proposed by this rulemaking

is necessary to implement section 4s(e) of the CEA, which mandates that

the Commission adopt rules establishing minimum initial and variation

margin requirements for CSEs on all swaps that are not cleared by a

registered derivatives clearing organization, and section 2(i) of the

CEA, which provides that the provisions of the CEA relating to swaps

that were enacted by Title VII of the Dodd-Frank Act (including any

rule prescribed or regulation promulgated thereunder) apply to

activities outside the United States that have a direct and significant

connection with activities in, or effect on, commerce of the United

States. Further, the information collection is necessary for the

Commission to determine whether the requirements of the foreign rules

are comparable to the Commission's rules.

As noted above, any CSE who is eligible for substituted compliance

may make a request for a comparability determination. Currently, there

are approximately 106 swap entities provisionally registered with the

Commission. The Commission further estimates that of the approximately

106 swap entities that are provisionally registered, approximately 54

are CSEs that are subject to the Commission's margin rules as they are

not subject to a Prudential Regulator. The Commission notes that any

foreign regulatory agency that has direct supervisory authority over

one or more CSEs and that is responsible to administer the relevant

foreign jurisdiction's margin requirements may also apply for a

comparability determination. Further, once a comparability

determination is made for a jurisdiction, it will apply for all

entities or transactions in that jurisdiction to the extent provided in

the determination, as approved by the Commission. The Commission

estimates that it will receive requests for a comparability

determination from 17 jurisdictions, consisting of the 16 jurisdictions

within the G20, plus Switzerland, and that each request will impose an

average of 10 burden hours.

Based upon the above, the estimated hour burden for collection is

calculated as follows:

[[Page 34840]]

Number of respondents: 17.

Frequency of collection: Once.

Estimated annual responses per registrant: 1.

Estimated aggregate number of annual responses: 17.

Estimated annual hour burden per registrant: 10 hours.

Estimated aggregate annual hour burden: 170 hours (17 registrants x

10 hours per registrant).

2. Information Collection--Non-Segregation Jurisdictions

Section 23.160(e) of the Final Rule provides that, in certain

foreign jurisdictions where inherent limitations in the legal or

operational infrastructure of the jurisdiction make it impracticable

for the CSE and its counterparty to post initial margin for the

uncleared swap pursuant to custodial arrangements that comply with the

Commission's margin rules, an FCS or a foreign branch of a U.S. CSE may

be eligible to engage in uncleared swaps with certain non-U.S.

counterparties without complying with the requirement to post initial

margin, and without complying with the requirement to hold initial

margin collected by the CSE with one or more custodians that are not

the CSE, its counterparty, or an affiliate of the CSE or its

counterparty, pursuant to section 23.157(b) of the Final Margin

Rule,\254\ but only if certain conditions are satisfied.\255\ In order

to rely on this provision, an FCS or foreign branch of a U.S. CSE will

need to satisfy all of the conditions of the rule, including that (1)

inherent limitations in the legal or operational infrastructure of the

foreign jurisdiction make it impracticable for the CSE and its

counterparty to post any form of eligible initial margin collateral for

the uncleared swap pursuant to custodial arrangements that comply with

the Commission's margin rules; (2) foreign regulatory restrictions

require the CSE to transact in uncleared swaps with the counterparty

through an establishment within the foreign jurisdiction and do not

permit the posting of collateral for the swap in compliance with the

custodial arrangements of section 23.157 of the Final Margin Rule in

the United States or a jurisdiction for which the Commission has issued

a comparability determination under the Final Rule with respect to

section 23.157; (3) the CSE's counterparty is not a U.S. person and is

not a CSE, and the counterparty's obligations under the uncleared swap

are not guaranteed by a U.S. person; \256\ (4) the CSE collects initial

margin in cash on a gross basis, in cash, and posts and collects

variation margin in cash, for the uncleared swap in accordance with the

Final Margin Rule; \257\ (5) for each broad risk category, as set out

in section 23.154(b)(2)(v) of the Final Margin Rule, the total

outstanding notional value of all uncleared swaps in that broad risk

category, as to which the CSE is relying on section 23.160 (e), may not

exceed 5 percent of the CSE's total outstanding notional value for all

uncleared swaps in the same broad risk category; (6) the CSE has

policies and procedures ensuring that it is in compliance with the

requirements of this provision; and (7) the CSE maintains books and

records properly documenting that all of the requirements of this

provision are satisfied.\258\

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\254\ As explained further in note 174, because CSEs that rely

on section 23.160(e) are not required to hold collateral in

accordance with section 23.157(b) for initial margin that they

collect, they also would not be required to comply with 23.157(c)

with respect to initial margin that they collect.

\255\ CSEs that are not FCSs or foreign branches of U.S. CSEs

and are not otherwise excluded from the Final Margin Rule could not

engage in swap transactions in these jurisdictions.

\256\ As noted above, the Commission would expect the CSE's

counterparty to be a local financial end user that is required to

comply with the foreign jurisdiction's laws and that is prevented by

regulatory restrictions in the foreign jurisdiction from posting

collateral for the uncleared swap in the United States or a

jurisdiction for which the Commission has issued a comparability

determination under the Final Rule, even using an affiliate.

\257\ As noted above, the CSE must collect initial margin in

accordance with Sec. 23.152(a) on a gross basis, in the form of

cash pursuant to Sec. 23.156(a)(1)(i) and post and collect

variation margin in accordance with section 23.153(a) in the form of

cash pursuant to section 23.156(a)(1)(i). See Sec. 23.160(e)(4) of

the Final Rule.

\258\ See 17 CFR 23.160(e).

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3. Information Collection--Non-Netting Jurisdictions

Section 23.160(d) of the Final Rule includes a special provision

for non-netting jurisdictions. This provision allows CSEs that cannot

conclude after sufficient legal review with a well-founded basis that

the netting agreement with a counterparty in a foreign jurisdiction

meets the definition of an ``eligible master netting agreement'' set

forth in the Final Margin Rule to nevertheless net uncleared swaps in

determining the amount of margin that they post, provided that certain

conditions are met. In order to avail itself of this special provision,

the CSE must treat the uncleared swaps covered by the agreement on a

gross basis in determining the amount of initial and variation margin

that it must collect, but may net those uncleared swaps in determining

the amount of initial and variation margin it must post to the

counterparty, in accordance with the netting provisions of the Final

Margin Rule. A CSE that enters into uncleared swaps in ``non-netting''

jurisdictions in reliance on this provision must have policies and

procedures ensuring that it is in compliance with the special

provision's requirements, and maintain books and records properly

documenting that all of the requirements of this exception are

satisfied.\259\

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\259\ See Sec. 23.160(d) of the Final Rule.

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As noted above, the Commission is publishing a separate notice in

the Federal Register concurrently with this final rule requesting

comments on the burden estimates of both new information collections to

amend OMB Control Number 3038-0111.

C. Cost-Benefit Considerations

1. Introduction

As discussed above, the Final Rule addresses the cross-border

application of the Commission's margin requirements. Specifically, the

Final Rule establishes certain key definitions (``U.S. person,''

``guarantee,'' and ``Foreign Consolidated Subsidiary''); allows CSEs to

rely on substituted compliance where appropriate; provides a limited

Exclusion for certain transactions between non-U.S. persons; includes

special provisions for ``non-segregation jurisdictions'' \260\ and

``non-netting jurisdictions;'' \261\ and establishes a framework for

making comparability determinations.

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\260\ As used in this release, a ``non-segregation

jurisdiction'' is a jurisdiction where inherent limitations in the

legal or operational infrastructure of the foreign jurisdiction make

it impracticable for the CSE and its counterparty to post initial

margin pursuant to custodial arrangements that comply with the Final

Margin Rule, as further described in section II.B.4.b.

\261\ As used in this release, a ``non-netting jurisdiction'' is

a jurisdiction in which a CSE cannot conclude, with a well-founded

basis, that the netting agreement with a counterparty in that

foreign jurisdiction meets the definition of an ``eligible master

netting agreement'' set forth in the Final Margin Rule, as described

in section II.B.5.b.

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In the sections that follow, the Commission discusses the costs and

benefits associated with the Final Rule on CSEs and affected market

participants and any reasonable alternatives.\262\ Given a general lack

of useful data regarding the costs and benefits of the Final Rule, from

commenters or otherwise, and the considerable uncertainty given that

foreign jurisdictions are at different

[[Page 34841]]

stages in implementing their regimes, the costs and benefits of the

Final Rule are generally considered in qualitative terms.

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\262\ As stated above, the Commission estimates that the Final

Rule will affect approximately 54 registered swap dealers and major

swap participants. The Commission further estimates that it will

receive requests for a comparability determination from 17

jurisdictions.

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The baseline against which the costs and benefits of this Final

Rule are being compared is the status quo, i.e., the swap market as it

exists as if the Final Margin Rule is in full effect.\263\ The cost-

benefit considerations section of the Final Margin Rule made clear that

CEA section 4s(e), read together with CEA section 2(i), applies the

margin rules to a CSE's swap activities outside the United States,

regardless of the domicile of the CSE or its counterparties.\264\

Accordingly, in considering the costs and benefits of this Final Rule,

the Commission focused on the impact of permitting substituted

compliance and certain exclusions from the Final Margin Rule.\265\

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\263\ 81 FR 636 (Jan. 6, 2016) (codified at 17 CFR parts 23 and

140). As the Commission noted above, the Final Margin Rule included

substantial modifications from the Proposed Margin Rule that further

aligned the Commission's margin requirements with International

Standards and, as a result, the potential for conflict with foreign

margin requirements should be reduced. See supra note 29.

\264\ See Final Margin Rule, 81 FR at 682. The Commission notes

that to the extent there may be differences in the particulars of

costs to foreign CSEs or financial end users, the Commission had not

been provided with information that would permit the evaluation of

any such differences.

\265\ As noted in the Final Margin Rule, as foreign

jurisdictions adopt their own margin rules, the existence of those

rules may affect the costs and benefits of the Final Margin Rule.

See Final Margin Rule, 81 FR at 682, n.359. For example, if certain

transactions become subject to duplicative foreign regulation, that

could increase costs, or reduce benefits, of compliance with the

Final Margin Rule. Because of the still developing state of foreign

law in this area and the absence of specific information on the

subject in the record, it was not possible to evaluate such effects

in detail in the Final Margin Rule release. In this rulemaking, the

same limitations do not permit a detailed evaluation of such

possible effects in the present proceeding and therefore, the

Commission discusses these possible effects in general qualitative

terms.

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The Commission is mindful of the potentially significant tradeoffs

inherent in the Final Rule. As discussed above, given the highly-

interconnected, global swap market, overseas risk can quickly manifest

in the United States. The cross-border application of the Commission's

margin rules is therefore important to protecting the U.S. financial

system from this risk. At the same time, competitive distortions and

market inefficiencies can result--and the benefits of the Commission's

cross-border framework could be reduced--if due consideration is not

given to comity principles. The Commission considered these tradeoffs

and worked to carefully tailor the cross-border approach in the Final

Rule to address comity considerations, mitigate the potential for undue

market distortions, and promote global coordination without

compromising the safety and soundness of CSEs.

Although commenters generally did not comment on the cost-benefit

discussion in the proposed rule itself,\266\ they did discuss various

costs and benefits associated with the Commission's proposal. These

comments are further addressed in the context of the Commission's cost-

benefit considerations below.

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\266\ But see IATP at 7 (Commission's assumptions about costs

and benefits of the Proposal were accurate considering the current

``stage of foreign jurisdiction rulemaking'' relating to margin

requirements); ABA/ABASA at 3 (Proposal did not adequately take into

account the costs of the proposed approach); ISDA at 5 (Proposal did

not give ``due weight'' to its impact on price discovery, risk

management, increased compliance and liquidity costs, market

fragmentation, or comity).

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2. Key Definitions

The extent to which the Commission's margin requirements apply--and

the availability of substituted compliance and the Exclusion--depends

on whether the relevant swap involves a U.S. person, a guarantee by a

U.S. person, or a Foreign Consolidated subsidiary. As discussed above,

the Final Rule adopts definitions of ``U.S. person,'' ``guarantee,''

and ``Foreign Consolidated Subsidiary'' solely for purposes of the

margin rules. The costs and benefits associated with these definitions,

and any reasonable alternatives, are discussed below. In general, the

Commission believes that the clear, objective nature of these terms,

along with the ability to rely on related written counterparty

representations, will promote legal certainty and help minimize the

costs associated with applying the Final Rule.

a. U.S. Person

As discussed in section II.A.1., the term ``U.S. person''

identifies individuals or entities whose activities have a significant

nexus to the U.S. market by virtue of being organized or domiciled in

the United States or the depth of their connection to the U.S. market,

even if they are domiciled or organized outside the United States. The

Final Rule generally follows a traditional, territorial approach to

defining a U.S. person, and the Commission believes that this

definition provides an objective and clear basis for determining those

individuals or entities that should be identified as a U.S. person.

Accordingly, the Commission does not believe market participants will

face significant costs in assessing their own U.S. person status,

particularly given the broad similarities between how the Final Rule

defines ``U.S. person'' and how the term is defined in the SEC's rules.

The Final Rule also makes clear that market participants may reasonably

rely on counterparty representations regarding their U.S. person status

absent indications to the contrary, which should further reduce any

operational costs associated with assessing U.S. person status.

The Final Rule addresses many of the concerns commenters raised

regarding the costs and benefits of its proposed approach to defining

``U.S. person.'' As discussed above, the Final Rule does not include a

U.S. majority-owned prong, which commenters argued would create

operational burdens for assessing U.S. person status and result in

regulatory overlap. Nor does it include a catchall provision, limiting

the Rule's application to a list of enumerated persons.

The Commission recognizes that, as commenters pointed out, legal

entities that fall within the unlimited U.S. responsibility prong may

also be subject to regulation under a foreign margin regime, creating

the potential for overlapping requirements. However, as discussed in

section II.A.1.c., the Commission believes that the unique nature of

the relationship between the legal entity and its U.S. person owner(s)

facilitates the legal entity's swap business and creates a significant

nexus between the legal entity and U.S. financial markets. While the

Commission understands that limiting application of the prong to

circumstances where the U.S. persons are majority owners of the legal

entity could mitigate the potential for overlapping requirements, as

the Commission explained above, the U.S. person owner(s) responsibility

for the legal entity's obligations and liabilities is unlimited

regardless of the amount of equity it owns in the legal entity.

Furthermore, excluding such legal entities from the scope of the U.S.

person definition could create incentives for U.S. persons to establish

such legal entities and use them as a pass-through for their own swap

activities solely for purposes of avoiding the margin requirements of

the Dodd-Frank Act.

The Commission also recognizes that further narrowing the

differences between the Final Rule's U.S. person definition and either

the SEC's definition or the ``U.S. person'' interpretation in the

Guidance could provide certain benefits. Namely, market participants

could enjoy reduced operational costs by relying on existing systems

and U.S. person status

[[Page 34842]]

determinations and not having to support multiple meanings of the term

``U.S. person.'' As discussed above, however, the Commission believes

that the Final Rule's ``U.S. person'' definition is appropriate in the

context of the margin rule. The Commission further believes that the

objective and clear definition set out in the Final Rule will result in

a lower overall cost for assessing U.S. person status going forward.

b. Guarantees

As explained in section II.A.2.c., under the Final Rule, the term

``guarantee'' is defined to include arrangements, pursuant to which one

party to an uncleared swap has rights of recourse against a guarantor,

with respect to its counterparty's obligations under the uncleared

swap. The Final Rule further defines what it means for a party to have

rights of recourse, and further encompasses any arrangement pursuant to

which the guarantor itself has a conditional or unconditional legally

enforceable right to receive or otherwise collect, in whole or in part,

payments from any other guarantor with respect to the counterparty's

obligations under the uncleared swap.\267\ As further explained in

section II.B.2.b.i, ``U.S. Guaranteed CSEs'' \268\ are eligible for

substituted compliance, but are ineligible for the Exclusion and the

special provision for non-segregation jurisdictions, to the same extent

as U.S. CSEs (except that foreign branches of U.S. CSEs may be eligible

for the special provision for non-segregation jurisdictions, as

described in section II.B.4.b.).\269\

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\267\ See 17 CFR 23.160(a)(2). As noted above, under the Final

Rule, the term ``guarantee'' applies whenever a party to the swap

has a legally enforceable right of recourse against a guarantor with

respect to its counterparty's obligations under the swap, regardless

of whether such right of recourse is conditioned upon the

counterparty's insolvency or failure to meet its obligations under

the relevant swap, or whether the counterparty seeking to enforce

the guarantee is required to make a demand for payment or

performance from its counterparty before proceeding against the U.S.

guarantor.

\268\ This release uses the term ``U.S. Guaranteed CSE'' for

convenience only. Whether a non-U.S. CSE falls within the meaning of

the term ``U.S. Guaranteed CSE'' varies on a swap-by-swap basis,

such that a non-U.S. CSE may be considered a U.S. Guaranteed CSE for

one swap and not another, depending on whether the non-U.S. CSE's

obligations under such swap are guaranteed by a U.S. person.

\269\ As further discussed above, the Final Rule generally

treats uncleared swaps of non-U.S. CSEs, where the non-U.S. CSE's

obligations under the uncleared swap are guaranteed by a U.S.

person, the same as uncleared swaps of a U.S. CSE. In addition,

guarantees may affect whether full or partial substituted compliance

is available. Further, under the Final Rule, the Exclusion is not

available if either party's obligations under the swap are

guaranteed by a U.S. person. In addition, in order for an FCS or

foreign branch of a U.S. CSE to engage in uncleared swaps in non-

segregation jurisdictions as provided in section 23.160(e) of the

Final Rule, one of the conditions that must be satisfied is that the

counterparty to the swap cannot be a U.S. person and its obligations

under the uncleared swap cannot be guaranteed by a U.S. person.

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As commenters noted, limiting the scope of guarantees in the

context of the margin requirements to arrangements that include a right

of recourse offers the benefit of legal certainty, making the

definition relatively easy to apply and helping keep down the cost of

determining whether a transaction involves a U.S. Guaranteed CSE.

Allowing market participants to rely on counterparty representations

with regard to the presence of guarantees should also help market

participants keep costs down. Although the Final Rule adopts a

definition of guarantee that is different than the existing

interpretation in the Guidance, which may result in market participants

incurring additional costs to update their current systems, those

operational challenges may be mitigated given that the definition is

straight-forward and similar to that previously adopted by the SEC. In

addition, while the inclusion of language that addresses indirect

guarantees may result in some added operational challenges or

assessment costs, the Commission believes the provision is necessary to

avoid creating incentives for market participants to structure

guarantee arrangements in order to avoid application of the Dodd-Frank

margin requirements. The Final Rule also achieves substantial benefits

in harmonizing with the guarantee definitions adopted by the Prudential

Regulators.

The Commission recognizes that, as discussed in section II.B.2 and

as pointed out by commenters, the definition of ``guarantee'' adopted

in the Final Rule does not encompass all forms of financial

arrangements or support that may result in a direct transfer of risk to

the U.S. financial markets, such as keepwells and liquidity puts. Nor

would it include instances in which a parent and a subsidiary entity

are closely related and the parent faces strong reputational incentives

to support the subsidiary. As discussed above, however, the Commission

believes that, in the context of the Final Rule, non-U.S. CSEs

benefitting from such other forms of U.S. financial support will likely

meet the definition of an FCS and thus be adequately covered by the

Commission's margin requirements. Given the further inclusion of

language that addresses indirect guarantees and the mandate to

coordinate with the Prudential Regulators, the Commission believes that

a more limited ``guarantee'' definition is appropriate in the context

of the cross-border application of the margin requirements and will not

undermine the safety and soundness of CSEs or the U.S. financial

markets.

c. Foreign Consolidated Subsidiary

As explained in section II.B.3, the Final Rule uses the term

``Foreign Consolidated Subsidiary'' to identify non-U.S. CSEs whose

uncleared swaps raise substantial supervisory concern in the United

States by virtue of their relationship with their U.S. ultimate parent

entity and because their financial position, operating results, and

statement of cash flows have a direct impact on the financial position,

risk profile and market value of their U.S. ultimate parent entity.

FCSs are not eligible for the Exclusion but are otherwise treated the

same as any other non-U.S. CSEs whose obligations under the relevant

swap are not guaranteed by a U.S. person.

As commenters noted, the Final Rule's use of a consolidation test

that relies on U.S. GAAP to define ``Foreign Consolidated Subsidiary''

promotes legal certainty by articulating a clear, familiar, bright-line

test. The Commission also took into account that the consolidation test

is already being used in preparing financial statements, and as a

result, should not result in more costs to market participants.\270\

The Commission further believes that allowing market participants to

rely on counterparty representations with respect to their status as an

FCS will reduce any operational costs that may be associated with

determining whether a counterparty is an FCS, especially given that the

Prudential Regulators adopted a similar definition for purposes of

their margin rules.

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\270\ As discussed in greater detail in section II.A.3, although

commenters suggested various modifications to the FCS definition,

such as relying on IFRS instead of U.S. GAAP or including non-U.S.

CSEs whose U.S. parent meets standards for consolidation, but is not

required to prepare consolidated financial statements under U.S.

GAAP, the Commission does not believe such modifications would offer

substantial benefits.

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3. Application

Section II.B describes the application of the Commission's margin

rules to cross-border uncleared swaps between CSEs and their

counterparties, including the availability of substituted compliance

and the Exclusion. The Final Rule also includes special provisions for

non-segregation

[[Page 34843]]

jurisdictions and non-netting jurisdictions.

a. Substituted Compliance

As described in section II.B.2.b and as set out in Table A, the

extent to which substituted compliance is available under the Final

Rule depends on whether the relevant swap involves a U.S. person, a

guarantee by a U.S. person, or an FCS. U.S. CSEs and U.S. Guaranteed

CSEs are eligible for substituted compliance only with respect to the

requirement to post (but not the requirement to collect) initial

margin, provided that their counterparty is a non-U.S. person

(including a non-U.S. CSE) whose obligations under the swap are not

guaranteed by a U.S. person.\271\ On the other hand, non-U.S. CSEs

whose obligations under the relevant swap are not guaranteed by a U.S.

person are broadly eligible for substituted compliance (including for

their swaps with U.S. persons that are not CSEs); however, only partial

substituted compliance would be available for such non-U.S. CSE's swaps

with U.S. CSEs or U.S. Guaranteed CSEs.\272\

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\271\ Similarly, a non-U.S. CSE (including an FCS) is eligible

for substituted compliance with respect to the requirement to

collect initial margin if its counterparty is a U.S. CSE or a U.S.

Guaranteed CSE.

\272\ A subset of these non-U.S. CSEs may qualify for the

Exclusion, as described in section II.B.3.b above.

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The Commission recognizes that the decision to offer any

substituted compliance in the first instance carries certain trade-

offs. Given the global and highly-interconnected nature of the swap

market, where risk does not respect national borders, market

participants are likely to be subject to the regulatory interest of

more than one jurisdiction. As commenters have pointed out, allowing

compliance with foreign margin requirements as an alternative to

domestic requirements can therefore reduce the application of

duplicative or conflicting requirements, resulting in lower compliance

costs and facilitating a more level playing field. Substituted

compliance also helps preserve the benefits of an integrated, global

swap market by fostering and advancing efforts among U.S. and foreign

regulators to collaborate in establishing robust regulatory standards,

as envisioned by the BCBS-IOSCO framework. If not properly implemented,

however, the Commission's margin regime could lose some of its

effectiveness. Accordingly, as commenters have recognized, the ultimate

costs and benefits of substituted compliance are affected by the

standard under which it is granted and the extent to which it is

applied. The Commission was mindful of this dynamic in structuring a

substituted compliance regime for the margin requirements and believes

the Final Rule strikes an appropriate balance, enhancing market

efficiency and fostering global coordination of margin requirements

without compromising the safety and soundness of CSEs and the U.S.

financial system.

The Commission also understands that, as commenters pointed out, by

not offering substituted compliance equally to all CSEs, the Final Rule

may lead to certain competitive disparities between CSEs and between

CSEs and non-CFTC registered dealers. For example, to the extent that

non-U.S. CSEs whose obligations are not guaranteed by a U.S. person can

rely on substituted compliance that is not available to U.S. CSEs or

U.S. Guaranteed CSEs, they may enjoy certain cost advantages (e.g.,

avoiding the costs of potentially duplicative or inconsistent

regulation, which could allow them to develop one enterprise-wide set

of compliance and operational infrastructures). The non-U.S. CSEs may

then be able to pass on these cost savings to their counterparties in

the form of better pricing or some other benefit. U.S. CSEs and U.S.

Guaranteed CSEs, on the other hand, could, depending on the extent to

which foreign margin requirements apply, be subject to both U.S. and

foreign margin requirements, and therefore be at a competitive

disadvantage. Counterparties may also be incentivized to transact with

CSEs that are offered substituted compliance in order to avoid being

subject to duplicative or conflicting margin requirements, which could

lead to increased market inefficiencies.\273\

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\273\ The Commission recognizes that its framework may impose

certain initial operational costs, as CSEs will be required to

determine the status of their counterparties in order to determine

the extent to which substituted compliance is available. The

Commission however believes the ability to obtain and rely on

counterparty representations should help mitigate such costs.

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Nevertheless, the Commission does not believe it is appropriate to

make substituted compliance broadly available to all CSEs. As discussed

above, the Commission has a strong supervisory interest in the

uncleared swaps activity of all CSEs, including non-U.S. CSEs, by

virtue of their registration with the Commission. Furthermore, U.S.

CSEs and U.S. Guaranteed CSEs are particularly key swap market

participants and their safety and soundness is critical to a well-

functioning U.S. swap market and the stability of the U.S. financial

system. Accordingly, in light of the Commission's supervisory interest

in the activities of U.S. persons and its statutory obligation to

ensure the safety and soundness of CSEs and the U.S. financial markets

in the context of uncleared swaps, the Commission believes that

substituted compliance is generally not appropriate for U.S. CSEs and

U.S. Guaranteed CSEs given their importance to the U.S. financial

markets.\274\ With respect to other non-U.S. CSEs (including FCSs) that

are not subject to a U.S. guarantee, however, the Commission believes

that, in the interest of international comity, making substituted

compliance broadly available is appropriate.

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\274\ As discussed in section II.B.2.b.i above, because

uncleared swaps of U.S. Guaranteed CSEs are identical in relevant

respects to a swap entered directly by a U.S. person, the Final Rule

treats these uncleared swaps the same as uncleared swaps of U.S.

CSEs.

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As further discussed in section II.B.2.b.i., the Commission

determined that partial substituted compliance is appropriate for U.S.

CSEs and U.S. Guaranteed CSEs in the limited case of posting (but not

collecting) initial margin. Contrary to commenters' assertions, the

Commission does not believe that partial substituted compliance is

impractical or will hinder the development of a standardized model for

initial margin. As discussed above, the Commission does not expect a

CSE to have two netting sets as a result of partial substituted

compliance, given that the U.S. CSE is always required to collect

initial margin according to the Commission's margin requirements while

it has the option to post according to the Commission's or its

counterparty's foreign margin requirements. If substituted compliance

is elected, the U.S. CSE will be deemed to satisfy the Commission's

margin requirements by meeting the foreign jurisdiction's margin

requirements, which will result in one netting set. Furthermore, the

Commission believes that permitting partial substituted compliance

allows market participants to avoid some costs associated with

complying with duplicative or conflicting requirements.

The Commission acknowledges that foreign branches may, for the

reasons raised by commenters and discussed above, be at a competitive

disadvantage compared to non-U.S. CSEs, with whom they may compete in

the countries in which they are established, by virtue of not being

eligible for substituted compliance. However, as discussed in section

II.B.2.b.i., the swap activities of a foreign branch of a U.S. CSE are

[[Page 34844]]

legally indistinguishable from the swap activities of the U.S. CSE.

Permitting more favorable treatment to foreign branches of U.S. CSEs

than the principal U.S. entity could create an easy way for U.S. CSEs

to circumvent the Commission's margin requirements, which could

undermine the safety and soundness of the U.S. CSE and the U.S.

financial system.\275\

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\275\ The Commission notes that the potential competitive

disparities could be minimized to the degree foreign margin

requirements are harmonized or otherwise comparable to the

Commission's.

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b. Exclusion

Under the Final Rule, the Commission excludes from its margin

requirements uncleared swaps entered into by a non-U.S. CSE with a non-

U.S. counterparty (including a non-U.S. CSE), provided that neither

counterparty's obligations under the relevant swap are guaranteed by a

U.S. person and neither counterparty is an FCS nor a U.S. branch of a

non-U.S. CSE. As discussed in section II.B.3.b above, the Commission

believes that it is appropriate to tailor the application of margin

requirements in the cross-border context, consistent with section 4s(e)

of the CEA and comity principles, so as to exclude this narrow class of

uncleared swaps involving a non-U.S. CSE and a non-U.S. counterparty.

The Commission believes that such non-U.S. CSEs may benefit from

the Exclusion because it allows them to avoid duplicative or

conflicting regulations where a transaction is subject to more than one

uncleared swap margin regime. On the other hand, to the extent the

Exclusion allows a non-U.S. CSE to rely on foreign margin requirements

that are not comparable to the Commission's, the Exclusion could result

in a less rigorous margin regime for such CSE or, in the extreme, the

absence of any margin requirements. This would not only increase the

risk posed by that CSE's swaps activities, but could create competitive

disparities between non-U.S. CSEs relying on the Exclusion and other

CSEs that are not eligible for the Exclusion. That is, the Exclusion

could allow these non-U.S. CSEs to offer better pricing or other terms

to their non-U.S. clients and put them in a better position (than CSEs

ineligible for the Exclusion) to compete with non-CFTC registered

dealers in the relevant foreign jurisdiction for foreign clients. The

degree of competitive disparity will depend on the degree of disparity

between the Commission's margin framework and that of the relevant

foreign jurisdiction.

The Commission does not generally expect that the Exclusion will

result in a significant diminution in the safety and soundness of the

non-U.S. CSE, as discussed in section II.B.3.b above. This is based on

several considerations. First, the Commission understands that most

swaps are currently transacted in jurisdictions that have agreed to

adhere to the BCBS-IOSCO framework, which covers financial

entities.\276\ Accordingly, the Commission anticipates that many

excluded swaps will nevertheless be subject to margin requirements in a

jurisdiction that adheres to the BCBS-IOSCO framework. Second, the

potential adverse effect on a non-U.S. CSE would be mitigated by the

Commission's capital requirements which, as proposed, would impose a

capital charge for uncollateralized exposures.\277\

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\276\ Element 2 of BCBS-IOSCO framework states: ``All covered

entities (i.e. financial firms and systemically important non-

financial entities) that engage in non-centrally cleared derivatives

must exchange initial and variation margin as appropriate to the

counterparty risks posed by such transactions.''

\277\ See Proposed Capital Rule, 76 FR 27802.

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Third, a non-U.S. CSE that can avail itself of the Exclusion will

still be subject to the Commission's margin rules with respect to all

uncleared swaps not meeting the criteria for the Exclusion, albeit with

the possibility of substituted compliance. That the non-U.S. CSE will

be subject to U.S. or comparable margin requirements when entering into

a swap with U.S. counterparties reduces the possibility of a cascading

event affecting U.S. counterparties and the U.S. financial markets more

broadly as a result of a default by the non-U.S. CSE.

The unavailability of the Exclusion to FCSs could disadvantage them

relative to other non-U.S. CSEs that are eligible for the Exclusion or

non-CFTC registered dealers within a foreign jurisdiction. As

commenters noted, non-U.S. CSEs that rely on the Exclusion or non-CFTC

registered dealers could realize a cost advantage over FCSs and thus

have the potential to offer better pricing terms to foreign clients.

The competitive disparity between non-U.S. CSEs that rely on the

Exclusion and FCSs, however, may be somewhat mitigated to the extent

that the relevant foreign jurisdiction implements the BCBS-IOSCO

framework.\278\

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\278\ As discussed above, a commenter's suggestion to exclude

transactions between an FCS and another non-guaranteed non-U.S.

person up to an aggregate 5 percent notional trading limit would be

difficult to monitor and could create incentives to ``cherry-pick''

and exclude uncleared swaps presenting the highest margin

requirement, which could thereby introduce undue risk into the

system.

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As noted above in section II.B.3.a., some commenters suggested that

treating U.S. branches of non-U.S. CSEs differently from the rest of

the CSE with respect to eligibility for the Exclusion could present

operational challenges, requiring non-U.S. CSEs to document

transactions with the U.S. branch under a separate ISDA Master

Agreement. However, as explained in section II.B.3.b., in most cases

the Commission does not believe a separate credit support agreement

will be necessary; \279\ furthermore, in those cases where it is

required, the Commission nevertheless believes that extending the

Exclusion to U.S. branches of non-U.S. CSEs would not be appropriate

for the reasons discussed in section II.B.3.b above.\280\ In addition,

allowing U.S. branches to rely on the Exclusion would enable them to

offer more competitive terms to non-U.S. clients than U.S. CSEs,

thereby gaining an advantage when dealing with non-U.S. clients

relative to other CSEs operating within the United States (i.e., U.S.

CSEs). On the other hand, for the same reason, the Final Rule could put

non-U.S. CSEs that conduct swaps business through their U.S. branches

at a disadvantage relative either to non-U.S. CSEs that are eligible

for the Exclusion or non-CFTC registered dealers that conduct swaps

business overseas. The Commission recognizes that while substituted

compliance will be broadly available to such U.S. branches of non-U.S.

CSEs, more compliance costs could be incurred by these entities than if

the Exclusion were made available if a foreign jurisdiction's margin

requirements are not comparable.\281\

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\279\ See supra note 158.

\280\ The Prudential Regulators' Final Margin Rule does not

grant an exclusion for the uncleared swaps of such U.S. branches on

the basis that U.S. branches of foreign banks clearly operate within

the United States and could pose risk to the U.S. financial system,

and the Commission believes that harmonization with the Prudential

Regulators' Final Margin Rule is appropriate. For further discussion

of the reasons that the Exclusion does not extend to U.S. branches

of non-U.S. CSEs, see section II.B.3.b above.

\281\ As noted above, U.S. branches of foreign banks (as

``foreign bank'' is defined in section __.2 of the Prudential

Regulators' Final Margin Rule (12 CFR part 237)) must comply with

the Prudential Regulators' margin rules, as these U.S. branches have

a Prudential Regulator, as defined in 1(a)(39) of the CEA.

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In order to effectuate the Commission's treatment of inter-

affiliate swaps under the Final Margin Rule, the Exclusion is not

available if the market-facing transaction of the non-U.S. CSE (that is

otherwise eligible for the Exclusion) is not subject to comparable

initial margin collection requirements in the home jurisdiction and any

of the

[[Page 34845]]

risk associated with the uncleared swap is transferred, directly or

indirectly, through inter-affiliate transactions, to a U.S. CSE. As a

consequence, the affected non-U.S. CSEs may be placed at a cost

disadvantage relative to non-U.S. CSEs that can rely on the Exclusion

as well as non-CFTC registered dealers operating in the foreign

jurisdiction that are not subject to similarly rigorous initial margin

collection requirements. The Commission, however, believes that this

limitation is necessary to ensure that the Exclusion does not

facilitate the transfer of risk to a U.S. CSE through the use of inter-

affiliate transactions that, per the Final Margin Rule, are generally

not subject to the collection of initial margin.

c. Non-Segregation Jurisdictions and Non-Netting Jurisdictions

The Final Rule includes a special provision for non-segregation

jurisdictions, where custodial arrangements that comply with the

Commission's requirements set out in Commission Regulation 23.157 \282\

are impracticable due to the legal or operational infrastructure of the

foreign jurisdiction.\283\ Specifically, an FCS or a foreign branch of

a U.S. CSE may, in certain circumstances, be excepted from the

requirement to post initial margin for the uncleared swap in compliance

with the custodial requirements of the Final Margin Rule in certain

foreign jurisdictions where inherent limitations in the legal or

operational infrastructure of the jurisdiction make it impracticable

for the CSE and its counterparty to comply with that requirement,

subject to certain conditions.

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\282\ See 17 CFR 23.157.

\283\ As used in this release, a ``non-segregation

jurisdiction'' is a jurisdiction where inherent limitations in the

legal or operational infrastructure of the foreign jurisdiction make

it impracticable for the CSE and its counterparty to post initial

margin pursuant to custodial arrangements that comply with the Final

Margin Rule, as further described in section II.B.4.b.

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The Commission understands from commenters that inherent legal and

operational constraints in certain jurisdictions could make compliance

with the custodial requirements of the Final Margin Rule impracticable.

Accordingly, absent the exception, FCSs and foreign branches of U.S.

CSEs would be unable to conduct uncleared swap business with clients

based in such jurisdictions, contributing to further market

inefficiencies. The Commission further agrees with commenters that an

exception from the requirement to post (but not from the requirement to

collect) initial margin when transacting with clients in non-

segregation jurisdictions will accomplish the goal of ensuring a CSE's

safety and soundness but with less disruption to existing business

relationships than the exchange of initial and variation margin would

impose.

After careful consideration, the Commission is adding a special

provision so that FCSs and foreign branches of U.S. CSEs will not be

foreclosed from engaging in uncleared swaps business in non-segregation

jurisdictions, with appropriate conditions, including a 5 percent

limitation, as discussed in section II.B.4.b above, to avoid

compromising the safety and soundness of CSEs. The Commission does not

believe a blanket de minimis exception from the Commission's margin

requirements, as suggested by commenters, is appropriate. Rather, the

Commission believes that carefully tailored relief from the Final

Margin Rule's requirement to post initial margin and the custodial

arrangement requirements that pertain to initial margin collected by a

CSE will accomplish the goal of allowing FCSs and foreign branches of

U.S. CSEs to carry on their swaps business in non-segregation

jurisdictions without creating the risks that would attend wholesale

exemption from margin requirements in these jurisdictions. In addition,

in light of the importance of FCSs and foreign branches of U.S. CSEs to

the U.S. financial system, the special provision includes certain

conditions that are designed to appropriately limit the swap activities

conducted by these CSEs in these jurisdictions in order to help ensure

their safety and soundness. Although these conditions may place

affected entities at a relative cost disadvantage when compared to non-

U.S. CSEs that can rely on the Exclusion and non-CFTC registered

dealers engaged in swaps activity in non-segregation jurisdictions, and

may limit the overall swap dealing activity of affected entities in

these jurisdictions, the Commission believes that the special provision

provides a substantial benefit to the affected entities by allowing

them to conduct a limited level of swaps business in non-segregation

jurisdictions where they would otherwise be foreclosed. While

permitting FCSs and foreign branches of U.S. CSEs to carry on their

swaps business in non-segregation jurisdictions in accordance with this

special provision is not without some risk, in that the initial margin

collected by FCSs and foreign branches of U.S. CSEs in reliance on this

provision is not subject to the custodial arrangement requirements of

the Final Margin Rule, the Commission believes that the conditions to

using this provision (including the 5 percent limit in each of four

broad risk categories set forth in Sec. 23.154(b)(2)(v)) should be

sufficient to prevent undue risk arising from uncleared swaps by FCSs

and foreign branches of U.S. CSEs relying on this provision.

The Final Rule also includes a special provision for ``non-

netting'' jurisdictions.\284\ In order to avail itself of this

provision, the CSE must treat the uncleared swaps covered by the

netting agreement on a gross basis in determining the amount of initial

and variation margin that it must collect, but may net those uncleared

swaps in determining the amount of initial and variation margin it must

post to the counterparty, in accordance with the netting provisions of

the Final Margin Rule. The Commission agrees that, as suggested by

commenters, without enforceable netting and collateral arrangements,

there is a risk that a CSE may not be able to effectively foreclose on

the margin in the event of a counterparty default, and a risk that the

administrator of an insolvent counterparty will ``cherry-pick'' from

posted collateral to be returned in the event of insolvency, which

could result in an increase in the risk in posting collateral. As with

the provision for non-segregation jurisdictions, this provision is

carefully tailored to allow CSEs to conduct swap transactions in ``non-

netting'' jurisdictions without abandoning the key protections behind

the netting requirement under the Final Margin Rule.\285\ If the

Commission were not to adopt this special provision, then a CSE would

have to collect and post margin on a gross basis, which would result in

greater costs to the CSE and result in additional credit risk, and put

them at a competitive disadvantage. It is possible that this would lead

to CSEs

[[Page 34846]]

being effectively precluded from doing business in these jurisdictions.

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\284\ As used in this release, a ``non-netting jurisdiction'' is

a jurisdiction in which a CSE cannot conclude, with a well-founded

basis, that the netting agreement with a counterparty in that

foreign jurisdiction meets the definition of an ``eligible master

netting agreement'' set forth in the Final Margin Rule, as described

in section II.B.5.b.

\285\ The Commission considered a broader provision, including,

as requested by commenters, excluding these transactions from its

margin rule. However, as netting provisions are critical to the

overall goal of margin requirements and the Commission is not

requiring CSEs to post margin on a gross basis, the Commission

believes that the regulatory gap that a broader provision would

create would be inconsistent with the Commission's mandate to

protect the safety and soundness of CSEs.

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4. Comparability Determinations

As noted in section II.C above, any CSE eligible for substituted

compliance may make a request for a comparability determination.

Currently, there are approximately 106 swap entities provisionally

registered with the Commission. The Commission further estimates that

of the 106 swap entities that are registered, approximately 54 are

subject to the Commission's margin rules, as they are not supervised by

a Prudential Regulator. However, the Commission notes that any foreign

regulatory agency that has direct supervisory authority to administer

the foreign regulatory framework for margin of uncleared swaps in the

requested foreign jurisdiction may apply for a comparability

determination. Further, once a comparability determination is made for

a jurisdiction, it will apply for all entities or transactions in that

jurisdiction to the extent provided in the determination, as approved

by the Commission.

Although there is uncertainty regarding the number of requests for

comparability determinations that will be made under the Final Rule,

the Commission estimates that it will receive applications for

comparability determinations from 17 jurisdictions representing 61

separate registrants, and that each request will impose an average of

10 burden hours per registrant.

Based on the above, the Commission estimates that the preparation

and filing of submission requests for comparability determinations

should take no more than 170 hours annually in the aggregate (17

registrants x 10 hours). The Commission further estimates that the

total aggregate cost of preparing such submission requests will be

$64,600, based on an estimated cost of $380 per hour for an in-house

attorney.\286\

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\286\ Although different registrants may choose to staff

preparation of the comparability determination request with

different personnel, Commission staff estimates that, on average, an

initial request could be prepared and submitted with 10 hours of an

in-house attorney's time. To estimate the hourly cost of an in-house

attorney's attorney time, Commission staff reviewed data in SIFMA's

Report on Management and Professional Earnings in the Securities

Industry 2013, modified by Commission staff to account for an 1800-

hour work-year and multiplied by a factor of 5.35 to account for

firm size, employee benefits and overhead. Commission staff believes

that use of a 5.35 multiplier here is appropriate because some

persons may retain outside advisors to assist in making the

determinations under the rules.

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As summarized in section II.C.2, several commenters complained that

the costs and burdens to market participants associated with the

Commission's proposed framework and standard for making comparability

determinations would be minimized if the Commission were to rely on the

BCBS-IOSCO framework as the sole basis for its comparability analysis

and take a ``holistic'' approach to determining comparability. As the

Commission explained above, however, while the BCBS-IOSCO framework

establishes minimum standards that are consistent with the objectives

of the Commission's own margin requirements, consistency with

International Standards is necessary but may not be sufficient to

finding comparability.\287\ Furthermore, allowing for a comparability

determination to be made based on comparable outcomes and objectives

notwithstanding differences in foreign jurisdictions' requirements

ensures that substituted compliance is made available to the fullest

extent possible. While the Commission recognizes that, to the extent

that a foreign margin regime is not deemed comparable in all respects,

CSEs eligible for substituted compliance may experience costs from

being required to comply with more than one set of specified margin

requirements, the Commission believes that this approach is preferable

to an all-or-nothing approach, in which market participants may be

forced to comply with both margin regimes in their entirety.

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\287\ See supra notes 232 and 233 and accompanying text. Also,

as the Commission noted above, the Final Margin Rule included

substantial modifications from the Proposed Margin Rule that further

aligned the Commission's margin requirements with International

Standards and, as a result, the potential for conflict with foreign

margin requirements should be reduced. See supra note 29.

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5. Section 15(a) Factors

Section 15(a) of the CEA requires the Commission to consider the

costs and benefits of its actions before promulgating a regulation

under the CEA or issuing certain orders. Section 15(a) further

specifies that the costs and benefits shall be evaluated in light of

five broad areas of market and public concern: (1) Protection of market

participants and the public; (2) efficiency, competitiveness, and

financial integrity of futures markets; (3) price discovery; (4) sound

risk management practices; and (5) other public interest

considerations. The Commission considers the costs and benefits

resulting from its discretionary determinations with respect to the

section 15(a) factors.

a. Protection of Market Participants and the Public

As described above, CEA section 4s(e)(2)(A) requires the Commission

to develop rules designed to ensure the safety and soundness of CSEs

and the U.S. financial system. On the one hand, full application of the

Commission's margin requirements to all uncleared swaps of CSEs would

help to ensure the safety and soundness of CSEs and the U.S. financial

system by reducing counterparty credit risk and the threat of

contagion. On the other hand, extending substituted compliance to

certain cross-border swaps reduces the potential for conflicting or

duplicative requirements, which would, in turn, reduce market

distortions and promote global harmonization. In addition, where

exceptions have been permitted (i.e., under the Exclusion and the

special provisions for non-segregation and non-netting jurisdictions),

the Commission has limited their availability to strike a balance

between international comity and the continuation of important business

activity by qualifying CSEs, on the one hand, and limiting risk to CSEs

and the U.S. financial system, on the other hand. While the Final Rule

will allow CSEs to comply with foreign margin requirements as an

alternative to the Commission's requirements in certain circumstances,

such margin requirements must be comparable in outcome and objectives,

and the Commission retains the authority to modify or condition the

availability of substituted compliance as necessary. Furthermore,

substituted compliance is available on a more limited basis for U.S.

CSEs and U.S. Guaranteed CSEs. Additionally, while the Final Rule also

excludes certain uncleared swap transactions involving non-U.S. CSEs

whose obligations under the relevant swap are not subject to a U.S.

guarantee from the Final Margin Rule and excepts qualifying CSEs from

certain requirements in non-segregation jurisdictions and non-netting

jurisdictions, the Exclusion and special provisions are narrowly

tailored and include safeguards to protect market participants and the

public. Overall, the Commission believes that the Final Rule takes

proper account of significant, and sometimes competing, factors in

order to effectively address the risk posed to the safety and soundness

of CSEs while creating a workable cross-border framework that reduces

the potential for undue market disruptions and promoting global

harmonization, thereby benefiting market participants and the public.

[[Page 34847]]

b. Efficiency, Competitiveness, and Financial Integrity

As discussed above, the Final Rule may have both a positive and

negative effect on market efficiency and competitiveness. As an initial

matter, substituted compliance and the Exclusion should improve

resource allocation efficiency by allowing market participants to avoid

potentially duplicative or conflicting requirements, reducing the

aggregate cost to the market of dealing uncleared swaps. By granting

this relief to some CSEs and not others, however, the Final Rule may

afford such CSEs a cost advantage compared to other CSEs that may be

required to comply with potentially duplicative or conflicting

requirements. Non-U.S. counterparties may also be incentivized to

transact with CSEs that are eligible for substituted compliance in

order to avoid complying with more than one margin regime (or the

Commission's margin regime alone), which could contribute to market

inefficiencies. In addition, as the Exclusion is not provided to all

CSEs, those that are not permitted to use the Exclusion may be at a

competitive disadvantage when competing in foreign jurisdictions that

do not have comparable margin rules. The Commission notes, however,

that to the extent that non-U.S. CSEs are domiciled in jurisdictions

with comparable requirements, this may mitigate possible regulatory

arbitrage by these CSEs.

At the same time, however, the Commission understands that if it

did not provide special accommodations for certain CSEs to enter into

certain markets, such CSEs would be disadvantaged and even prohibited

from engaging in swaps in these jurisdictions.

Furthermore, the Commission believes that the Final Rule ensures

that substituted compliance and the Exclusion are extended in a

tailored fashion that is consistent with protecting the integrity of

the swaps market. Substituted compliance is only provided in the event

that the relevant foreign jurisdiction has a comparable margin rule; if

not, the CSE must comply with the Commission's margin rule. Even in

instances where the Exclusion is available, the Commission notes that:

(1) The Final Margin Rule will cover many of the swaps of the non-U.S.

CSEs (eligible for the Exclusion) with other counterparties, namely,

all U.S. counterparties; (2) the Exclusion is limited to a narrow set

of swaps by non-U.S. CSEs; and (3) the excluded swaps may be covered by

another foreign regulator's margin rule that is based on the BCBS-IOSCO

framework.

c. Price Discovery

The Commission generally believes that substituted compliance, by

reducing the potential for duplicative or conflicting regulations,

could reduce impediments to transact uncleared swaps on a cross-border

basis. This, in turn, may enhance liquidity as more market participants

may be willing to enter into uncleared swaps, thereby possibly

improving price discovery--and ultimately reducing market

fragmentation. Alternatively, if substituted compliance or the

Exclusion were not made available, CSEs could be incentivized to

consider setting up their swap operations outside the Commission's

jurisdiction, and as a result, increase the potential for market

fragmentation. Additionally, exceptions for non-segregation and non-

netting jurisdictions could increase price discovery in such

jurisdictions by opening such markets to CSEs where, by virtue of the

application of the Commission's margin requirements, such CSEs would

otherwise be unable to deal uncleared swaps.

d. Sound Risk Management Practices

The Commission believes that the Final Rule is consistent with

sound risk management practices. The Final Margin Rule promotes sound

risk management practices, and this Final Rule requires U.S. CSEs and

U.S. Guaranteed CSEs to apply that rule in its entirety for most cross-

border transactions. To the extent substituted compliance is available

in limited fashion to these entities and more broadly to non-U.S. CSEs,

the foreign margin requirements must be comparable to the Commission's

in outcome and objectives. That should ensure that margin's critical

risk management function is unaffected. Although the Exclusion could

potentially lead to weaker risk management for eligible non-U.S. CSEs

to the extent that they are not otherwise subject to comparable foreign

margin requirements, the Commission notes that in jurisdictions that

are BCBS-IOSCO compliant, such CSEs will be subject to margin

requirements that satisfy the minimum International Standards

established by the BCBS-IOSCO framework.\288\ Furthermore, while the

Commission recognizes that a special provision in the Final Rule will

excuse CSEs that are FCSs and foreign branches of U.S. CSEs from the

requirement to post initial margin pursuant to custodial arrangements

that comply with the Final Margin Rule, the Commission believes that

the impact to risk management will be mitigated by the relatively small

volume of such transactions, the conditions required to rely on this

special provision, including a limit on the overall swaps using the

special provision, and the continued applicability of other

requirements, including margin with respect to other uncleared swaps of

such FCSs and foreign branches and broader capital requirements.\289\

The Commission similarly believes that the risk management implications

of the special provision for non-netting jurisdictions will be limited.

As explained above, CSEs will still be required to calculate and

collect initial margin on a gross basis to ensure that the CSE can

obtain the collateral posted with the counterparty in the event of

counterparty default.

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\288\ As indicated in supra note 23, representatives of 26

regulatory authorities participated in the WGMR that developed the

BCBS-IOSCO framework.

\289\ See Proposed Capital Rule, 76 FR 27802.

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e. Other Public Interest Considerations

The Commission has not identified any additional public interest

considerations related to the costs and benefits of the Final Rule.

List of Subjects in 17 CFR Part 23

Swaps, Swap dealers, Major swap participants, Capital and margin

requirements.

For the reasons discussed in the preamble, the Commodity Futures

Trading Commission amends 17 CFR part 23 as set forth below:

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

0

1. The authority citation for part 23 is revised to read as follows:

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t,

9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.

Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b),

Pub. L. 111-203, 124 Stat. 1641 (2010).

0

2. Add Sec. 23.160 to read as follows:

Sec. 23.160 Cross-border application.

(a) Definitions. For purposes of this section only:

(1) Foreign Consolidated Subsidiary means a non-U.S. CSE in which

an ultimate parent entity that is a U.S. person has a controlling

financial interest, in accordance with U.S. GAAP, such that the U.S.

ultimate parent entity includes the non-U.S. CSE's operating results,

financial position and statement

[[Page 34848]]

of cash flows in the U.S. ultimate parent entity's consolidated

financial statements, in accordance with U.S. GAAP.

(2) Guarantee means an arrangement pursuant to which one party to

an uncleared swap has rights of recourse against a guarantor, with

respect to its counterparty's obligations under the uncleared swap. For

these purposes, a party to an uncleared swap has rights of recourse

against a guarantor if the party has a conditional or unconditional

legally enforceable right to receive or otherwise collect, in whole or

in part, payments from the guarantor with respect to its counterparty's

obligations under the uncleared swap. In addition, in the case of any

arrangement pursuant to which the guarantor has a conditional or

unconditional legally enforceable right to receive or otherwise

collect, in whole or in part, payments from any other guarantor with

respect to the counterparty's obligations under the uncleared swap,

such arrangement will be deemed a guarantee of the counterparty's

obligations under the uncleared swap by the other guarantor.

(3) International standards mean the margin policy framework for

non-cleared, bilateral derivatives issued by the Basel Committee on

Banking Supervision and the International Organization of Securities in

September 2013, as subsequently updated, revised, or otherwise amended,

or any other international standards, principles or guidance relating

to margin requirements for non-cleared, bilateral derivatives that the

Commission may in the future recognize, to the extent that they are

consistent with United States law (including the margin requirements in

the Commodity Exchange Act).

(4) Non-U.S. CSE means a covered swap entity that is not a U.S.

person. The term ``non-U.S. CSE'' includes a ``Foreign Consolidated

Subsidiary'' or a U.S. branch of a non-U.S. CSE.

(5) Non-U.S. person means any person that is not a U.S. person.

(6) Ultimate parent entity means the parent entity in a

consolidated group in which none of the other entities in the

consolidated group has a controlling interest, in accordance with U.S.

GAAP.

(7) United States means the United States of America, its

territories and possessions, any State of the United States, and the

District of Columbia.

(8) U.S. CSE means a covered swap entity that is a U.S. person.

(9) U.S. GAAP means U.S. generally accepted accounting principles.

(10) U.S. person means:

(i) A natural person who is a resident of the United States;

(ii) An estate of a decedent who was a resident of the United

States at the time of death;

(iii) A corporation, partnership, limited liability company,

business or other trust, association, joint-stock company, fund or any

form of entity similar to any of the foregoing (other than an entity

described in paragraph (a)(10)(iv) or (v) of this section) (a ``legal

entity''), in each case that is organized or incorporated under the

laws of the United States or that has its principal place of business

in the United States, including any branch of such legal entity;

(iv) A pension plan for the employees, officers or principals of a

legal entity described in paragraph (a)(10)(iii) of this section,

unless the pension plan is primarily for foreign employees of such

entity;

(v) A trust governed by the laws of a state or other jurisdiction

in the United States, if a court within the United States is able to

exercise primary supervision over the administration of the trust;

(vi) A legal entity (other than a limited liability company,

limited liability partnership or similar entity where all of the owners

of the entity have limited liability) that is owned by one or more

persons described in paragraphs (a)(10)(i) through (v) of this section

and for which such person(s) bears unlimited responsibility for the

obligations and liabilities of the legal entity, including any branch

of the legal entity; or

(vii) An individual account or joint account (discretionary or not)

where the beneficial owner (or one of the beneficial owners in the case

of a joint account) is a person described in paragraphs (a)(10)(i)

through (vi) of this section.

(b) Applicability of margin requirements. The requirements of

Sec. Sec. 23.150 through 23.161 apply as follows.

(1) Uncleared swaps of U.S. CSEs or Non-U.S. CSEs whose obligations

under the relevant swap are guaranteed by a U.S. person--(i)

Applicability of U.S. margin requirements; availability of substituted

compliance for requirement to post initial margin. With respect to each

uncleared swap entered into by a U.S. CSE or a non-U.S. CSE whose

obligations under the swap are guaranteed by a U.S. person, the U.S.

CSE or non-U.S. CSE whose obligations under the swap are guaranteed by

a U.S. person shall comply with the requirements of Sec. Sec. 23.150

through 23.161 of this part, provided that the U.S. CSE or non-U.S. CSE

whose obligations under the swap are guaranteed by a U.S. person may

satisfy its requirement to post initial margin to certain

counterparties to the extent provided in paragraph (b)(1)(ii) of this

section.

(ii) Compliance with foreign initial margin collection requirement.

A covered swap entity that is covered by paragraph (b)(1)(i) of this

section may satisfy its requirement to post initial margin under this

part by posting initial margin in the form and amount, and at such

times, that its counterparty is required to collect initial margin

pursuant to a foreign jurisdiction's margin requirements, but only to

the extent that:

(A) The counterparty is neither a U.S. person nor a non-U.S. person

whose obligations under the relevant swap are guaranteed by a U.S.

person;

(B) The counterparty is subject to such foreign jurisdiction's

margin requirements; and

(C) The Commission has issued a comparability determination under

paragraph (c) of this section (``Comparability Determination'') with

respect to such foreign jurisdiction's requirements regarding the

posting of initial margin by the covered swap entity (that is covered

in paragraph (b)(1) of this section).

(2) Uncleared swaps of Non-U.S. CSEs whose obligations under the

relevant swap are not guaranteed by a U.S. person--(i) Applicability of

U.S. Margin requirements except where an exclusion applies;

Availability of substituted compliance. With respect to each uncleared

swap entered into by a non-U.S. CSE whose obligations under the

relevant swap are not guaranteed by a U.S. person, the non-U.S. CSE

shall comply with the requirements of Sec. Sec. 23.150 through 23.161

except to the extent that an exclusion is available under paragraph

(b)(2)(ii) of this section, provided that a non-U.S. CSE whose

obligations under the relevant swap are not guaranteed by a U.S. person

may satisfy its margin requirements under this part to the extent

provided in paragraphs (b)(2)(iii) and (b)(2)(iv) of this section.

(ii) Exclusion. (A) Except as provided in paragraph (b)(2)(ii)(B)

of this section, a non-U.S. CSE shall not be required to comply with

the requirements of Sec. Sec. 23.150 through 23.161 with respect to

each uncleared swap it enters into to the extent that the following

conditions are met:

(1) The non-U.S. CSE's obligations under the relevant swap are not

guaranteed by a U.S. person;

(2) The non-U.S. CSE is not a U.S. branch of a non-U.S. CSE;

[[Page 34849]]

(3) The non-U.S. CSE is not a Foreign Consolidated Subsidiary; and

(4) The counterparty to the uncleared swap is a non-U.S. person

(excluding a Foreign Consolidated Subsidiary or the U.S. branch of a

non-U.S. CSE), whose obligations under the relevant swap are not

guaranteed by a U.S. person.

(B) Notwithstanding paragraph (b)(2)(ii)(A) of this section, any

uncleared swap of a non-U.S. CSE that meets the conditions for the

Exclusion set forth in paragraph (b)(2)(ii)(A) must nevertheless comply

with Sec. Sec. 23.150 through 23.161 if:

(1) The uncleared swap of the non-U.S. CSE is not covered by a

Comparability Determination with respect to the initial margin

collection requirements in the relevant foreign jurisdiction in

accordance with paragraph (c) of this section; and

(2) The non-U.S. CSE enters into an inter-affiliate swap(s),

transferring any risk arising out of the uncleared swap described in

paragraph (b)(2)(ii)(B)(1) of this section directly or indirectly, to a

margin affiliate (as the term ``margin affiliate'' is defined in Sec.

23.151 of this part) that is a U.S. CSE or a U.S. Guaranteed CSE.

(iii) Availability of substituted compliance where the counterparty

is not a U.S. CSE or a non-U.S. CSE whose obligations under the

relevant swap are guaranteed by a U.S. person. Except to the extent

that an exclusion is available under paragraph (b)(2)(ii) of this

section, with respect to each uncleared swap entered into by a non-U.S.

CSE whose obligations under the relevant swap are not guaranteed by a

U.S. person with a counterparty (except where the counterparty is

either a U.S. CSE or a non-U.S. CSE whose obligations under the

relevant swap are guaranteed by a U.S. person), the non-U.S. CSE whose

obligations under the relevant swap are not guaranteed by a U.S. person

may satisfy margin requirements under this part by complying with the

margin requirements of a foreign jurisdiction to which such non-U.S.

CSE (whose obligations under the relevant swap are not guaranteed by a

U.S. person) is subject, but only to the extent that the Commission has

issued a Comparability Determination under paragraph (c) of this

section for such foreign jurisdiction.

(iv) Availability of substituted compliance where the counterparty

is a U.S. CSE or a non-U.S. CSE whose obligations under the relevant

swap are guaranteed by a U.S. person. With respect to each uncleared

swap entered into by a non-U.S. CSE whose obligations under the

relevant swap are not guaranteed by a U.S. person with a counterparty

that is a U.S. CSE or a non-U.S. CSE whose obligations under the

relevant swap are guaranteed by a U.S. person, the non-U.S. CSE (whose

obligations under the relevant swap are not guaranteed by a U.S.

person) may satisfy its requirement to collect initial margin under

this part by collecting initial margin in the form and amount, and at

such times and under such arrangements, that the non-U.S. CSE (whose

obligations under the relevant swap are not guaranteed by a U.S.

Person) is required to collect initial margin pursuant to a foreign

jurisdiction's margin requirements, provided that:

(A) The non-U.S. CSE (whose obligations under the relevant swap are

not guaranteed by a U.S. person) is subject to the foreign

jurisdiction's regulatory requirements; and

(B) The Commission has issued a Comparability Determination with

respect to such foreign jurisdiction's margin requirements.

(c) Comparability determinations--(1) Eligibility requirements. The

following persons may, either individually or collectively, request a

Comparability Determination with respect to some or all of the

Commission's margin requirements:

(i) A covered swap entity that is eligible for substituted

compliance under this section; or

(ii) A foreign regulatory authority that has direct supervisory

authority over one or more covered swap entities and that is

responsible for administering the relevant foreign jurisdiction's

margin requirements.

(2) Submission requirements. Persons requesting a Comparability

Determination should provide the Commission (either by hard copy or

electronically):

(i) A description of the objectives of the relevant foreign

jurisdiction's margin requirements;

(ii) A description of how the relevant foreign jurisdiction's

margin requirements address, at minimum, each of the following elements

of the Commission's margin requirements. Such description should

identify the specific legal and regulatory provisions that correspond

to each element and, if necessary, whether the relevant foreign

jurisdiction's margin requirements do not address a particular element:

(A) The products subject to the foreign jurisdiction's margin

requirements;

(B) The entities subject to the foreign jurisdiction's margin

requirements;

(C) The treatment of inter-affiliate derivative transactions;

(D) The methodologies for calculating the amounts of initial and

variation margin;

(E) The process and standards for approving models for calculating

initial and variation margin models;

(F) The timing and manner in which initial and variation margin

must be collected and/or paid;

(G) Any threshold levels or amounts;

(H) Risk management controls for the calculation of initial and

variation margin;

(I) Eligible collateral for initial and variation margin;

(J) The requirements of custodial arrangements, including

segregation of margin and rehypothecation;

(K) Margin documentation requirements; and

(L) The cross-border application of the foreign jurisdiction's

margin regime.

(iii) A description of the differences between the relevant foreign

jurisdiction's margin requirements and the International Standards;

(iv) A description of the ability of the relevant foreign

regulatory authority or authorities to supervise and enforce compliance

with the relevant foreign jurisdiction's margin requirements. Such

description should discuss the powers of the foreign regulatory

authority or authorities to supervise, investigate, and discipline

entities for compliance with the margin requirements and the ongoing

efforts of the regulatory authority or authorities to detect and deter

violations of, and ensure compliance with, the margin requirements; and

(v) Copies of the foreign jurisdiction's margin requirements

(including an English translation of any foreign language document);

(vi) Any other information and documentation that the Commission

deems appropriate.

(3) Standard of review. The Commission will issue a Comparability

Determination to the extent that it determines that some or all of the

relevant foreign jurisdiction's margin requirements are comparable to

the Commission's corresponding margin requirements. In determining

whether the requirements are comparable, the Commission will consider

all relevant factors, including:

(i) The scope and objectives of the relevant foreign jurisdiction's

margin requirements;

(ii) Whether the relevant foreign jurisdiction's margin

requirements achieve comparable outcomes to the Commission's

corresponding margin requirements;

(iii) The ability of the relevant regulatory authority or

authorities to

[[Page 34850]]

supervise and enforce compliance with the relevant foreign

jurisdiction's margin requirements; and

(iv) Any other facts and circumstances the Commission deems

relevant.

(4) Reliance. Any covered swap entity that, in accordance with a

Comparability Determination, complies with a foreign jurisdiction's

margin requirements, would be deemed to be in compliance with the

Commission's corresponding margin requirements. Accordingly, if the

Commission determines that a covered swap entity has failed to comply

with the foreign jurisdiction's margin requirements, it could initiate

an action for a violation of the Commission's margin requirements. All

covered swap entities, regardless of whether they rely on a

Comparability Determination, remain subject to the Commission's

examination and enforcement authority.

(5) Conditions. In issuing a Comparability Determination, the

Commission may impose any terms and conditions it deems appropriate.

(6) Modifications. The Commission reserves the right to further

condition, modify, suspend, terminate or otherwise restrict a

Comparability Determination in the Commission's discretion.

(7) Delegation of authority. The Commission hereby delegates to the

Director of the Division of Swap Dealer and Intermediary Oversight, or

such other employee or employees as the Director may designate from

time to time, the authority to request information and/or documentation

in connection with the Commission's issuance of a Comparability

Determination.

(d) Non-netting jurisdiction requirements. Except as provided in

paragraph (e) of this section, if a CSE cannot conclude after

sufficient legal review with a well-founded basis that the netting

agreement described in Sec. 23.152(c) meets the definition of

``eligible master netting agreement'' set forth in Sec. 23.151, the

CSE must treat the uncleared swaps covered by the agreement on a gross

basis for the purposes of calculating and complying with the

requirements of Sec. 23.152(a) and Sec. 23.153(a) to collect margin,

but the CSE may net those uncleared swaps in accordance with Sec.

23.152(c) and Sec. 23.153(d) for the purposes of calculating and

complying with the requirements of this part to post margin. A CSE that

relies on this paragraph (d) must have policies and procedures ensuring

that it is in compliance with the requirements of this paragraph, and

maintain books and records properly documenting that all of the

requirements of this paragraph (d) are satisfied.

(e) Jurisdictions Where Compliance with Custodial Arrangement

Requirements is Unavailable. Sections 23.152(b), 23.157(b), and

paragraph (d) of this section do not apply to an uncleared swap entered

into by a Foreign Consolidated Subsidiary or a foreign branch of a U.S.

CSE if:

(1) Inherent limitations in the legal or operational infrastructure

in the applicable foreign jurisdiction make it impracticable for the

CSE and its counterparty to post any form of eligible initial margin

collateral recognized pursuant to Sec. 23.156 in compliance with the

custodial arrangement requirements of Sec. 23.157;

(2) The CSE is subject to foreign regulatory restrictions that

require the CSE to transact in uncleared swaps with the counterparty

through an establishment within the foreign jurisdiction and do not

accommodate the posting of collateral for the uncleared swap in

compliance with the custodial arrangements of Sec. 23.157 in the

United States or a jurisdiction for which the Commission has issued a

comparability determination under paragraph (c) of this section with

respect to Sec. 23.157;

(3) The counterparty to the uncleared swap is a non-U.S. person

that is not a CSE, and the counterparty's obligations under the

uncleared swap are not guaranteed by a U.S. person;

(4) The CSE collects initial margin for the uncleared swap in

accordance with Sec. 23.152(a) in the form of cash pursuant to Sec.

23.156(a)(1)(i), and posts and collects variation margin in accordance

with Sec. 23.153(a) in the form of cash pursuant to Sec.

23.156(a)(1)(i);

(5) For each broad risk category, as set out in Sec.

23.154(b)(2)(v), the total outstanding notional value of all uncleared

swaps in that broad risk category, as to which the CSE is relying on

this paragraph (e), may not exceed 5% of the CSE's total outstanding

notional value for all uncleared swaps in the same broad risk category;

(6) The CSE has policies and procedures ensuring that it is in

compliance with the requirements of this paragraph (e); and

(7) The CSE maintains books and records properly documenting that

all of the requirements of this paragraph (e) are satisfied.

Issued in Washington, DC, on May 24, 2016, by the Commission.

Christopher J. Kirkpatrick,

Secretary of the Commission.

Note: The following table and appendices will not appear in the

Code of Federal Regulations.

Table A--Application of the Final Rule

The following table should be read in conjunction with the rest of

the preamble and the text of the Final Rule, as well as the footnotes

at the end of the table.

------------------------------------------------------------------------

Applicable margin

CSE Counterparty requirements

------------------------------------------------------------------------

U.S. CSE.................... U.S. person U.S. (All).

or.......................... (including U.S.

Non-U.S. CSE (including U.S. CSE).

branch of a non-U.S. CSE Non-U.S.

and a Foreign Consolidated person (including

Subsidiary (``FCS'')) whose non-U.S. CSE, FCS,

obligations under the and U.S. branch of

relevant swap are a non-U.S. CSE)

guaranteed by a U.S. person. whose obligations

under the relevant

swap are guaranteed

by a U.S. person.

Non-U.S. U.S. (Initial Margin

person (including collected by CSE in

non-U.S. CSE, FCS column 1).

and U.S. branch of Substituted

a non-U.S. CSE) Compliance (Initial

whose obligations Margin posted by

under the relevant CSE in column 1).

swap are not U.S. (Variation

guaranteed by a Margin).

U.S. person.

FCS whose obligations under U.S. CSE... U.S. (Initial Margin

the relevant swap are not Non-U.S. posted by CSE in

guaranteed by a U.S. person. CSE (including U.S. column 1).

or.......................... branch of a non- Substituted

U.S. branch of a non-U.S. U.S. CSE and FCS) Compliance (Initial

CSE whose obligations under whose obligations Margin collected by

the relevant swap are not under the relevant CSE in column 1).

guaranteed by a U.S. person. swap are guaranteed U.S. (Variation

by a U.S. person. Margin).

[[Page 34851]]

U.S. person Substituted

(except as noted Compliance (All).

above for a CSE).

Non-U.S.

person whose

obligations under

the swap are

guaranteed by a

U.S. person (except

a non-U.S. CSE,

U.S. branch of a

non-U.S. CSE, and

FCS whose

obligations are

guaranteed, as

noted above).

Non-U.S.

person (including

non-U.S. CSE, U.S.

branch of a non-

U.S. CSE, and a

FCS) whose

obligations under

the relevant swap

are not guaranteed

by a U.S. person.

Non-U.S. CSE (that is not an U.S. CSE... U.S. (Initial Margin

FCS or a U.S. branch of a Non-U.S. posted by CSE in

non-U.S. CSE) whose CSE (including U.S. column 1).

obligations under the branch of a non- Substituted

relevant swap are not U.S. CSE and FCS) Compliance (Initial

guaranteed by a U.S. person. whose obligations Margin collected by

under the swap are CSE in column 1).

guaranteed by a U.S. (Variation

U.S. person. Margin).

U.S. person Substituted

(except as noted Compliance (All).

above for a CSE).

Non-U.S.

person whose

obligations under

the swap are

guaranteed by a

U.S. person (except

a non-U.S. CSE

whose obligations

are guaranteed, as

noted above).

U.S. branch

of a non-U.S. CSE

or FCS, in each

case whose

obligations under

the relevant swap

are not guaranteed

by a U.S. person.

Non-U.S. Excluded (except in

person (including a connection with

non-U.S. CSE, but certain inter-

not an FCS or a affiliate swaps).

U.S. branch of a

non-U.S. CSE) whose

obligations under

the relevant swap

are not guaranteed

by a U.S. person.

------------------------------------------------------------------------

\1\ The term ``U.S. person'' is defined in Sec. 23.160(a)(10) of the

Final Rule. A ``non-U.S. person'' is any person that is not a ``U.S.

person.'' The term swap means an uncleared swap and is defined in Sec.

23.151 of the Final Margin Rule. See Margin Requirements for

Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 FR

636 (Jan. 6, 2016).

\2\ As used in this table, the term ``Foreign Consolidated Subsidiary''

or ``FCS'' refers to a non-U.S. CSE in which an ultimate parent entity

that is a U.S. person has a controlling financial interest, in

accordance with U.S. GAAP, such that the U.S. ultimate parent entity

includes the non-U.S. CSE's operating results, financial position and

statement of cash flows in the U.S. ultimate parent entity's

consolidated financial statements, in accordance with U.S. GAAP. The

term ``ultimate parent entity'' means the parent entity in a

consolidated group in which none of the other entities in the

consolidated group has a controlling interest, in accordance with U.S.

GAAP.

\3\ Under Sec. 23.160(e) of the Final Rule, in certain foreign

jurisdictions where inherent limitations in the legal or operational

infrastructure of the jurisdiction make it impracticable for the CSE

and its counterparty to post initial margin for the uncleared swap in

compliance with the custodial arrangement requirements of the Final

Margin Rule, an FCS (or non-U.S. branch of a U.S. CSE) may be eligible

to engage in uncleared swaps with certain non-U.S. counterparties,

subject to a limit, but only if certain conditions are satisfied.

Under the limit, for each broad risk category set out in Sec.

23.154(b)(2)(v), the total outstanding notional value of all uncleared

swaps in that broad risk category, as to which the CSE is relying on

Sec. 23.160(e), may not exceed 5% of the CSE's total outstanding

notional value for all uncleared swaps in the same broad risk

category. The specified conditions include collecting the gross amount

of initial margin in cash, and posting and collecting variation margin

in cash, in accordance with the Final Margin Rule. The CSE's

counterparty must be a non-U.S. person that is not a CSE, and the

counterparty's obligations under the swap must not be guaranteed by a

U.S. person. This provision does not apply if the CSE that is subject

to the foreign regulatory restrictions is permitted to post collateral

for the uncleared swap in compliance with the custodial arrangements

of Sec. 23.157 in the United States or a jurisdiction for which the

Commission has issued a comparability determination with respect to

Sec. 23.157. An FCS (or non-U.S. branch of a U.S. CSE) that relies

on this special provision would not post initial margin in qualifying

foreign jurisdictions, and would not be required to hold initial

margin that they collect with one or more custodians that are not the

CSE, its counterparty, or an affiliate of the CSE or its counterparty

as would otherwise be required by Sec. 23.157(b) of the Final Margin

Rule. CSEs that rely on this special provision must have policies and

procedures to ensure compliance and maintain books and records

properly documenting that all of the requirements of this provision

are satisfied.

If a CSE cannot conclude after sufficient legal review with a well-

founded basis that the netting agreement with a counterparty in a

foreign jurisdiction meets the definition of an ``eligible master

netting agreement'' set forth in the Final Margin Rule, the CSE must

treat the uncleared swaps covered by the netting agreement on a gross

basis in determining the amount of initial and variation margin that

it must collect, but the CSE may net those uncleared swaps in

accordance with the netting provisions of the Final Margin Rule in

determining the amount of initial and variation margin that it must

post to the counterparty. The CSE must have policies and procedures to

ensure compliance and maintain books and records properly documenting

that all of the requirements of this provision are satisfied.

\4\ In order to preserve the Commission's intent with respect to the

treatment of inter-affiliate swaps under the Final Margin Rule, the

Exclusion is not available if the market-facing swap of the non-U.S.

CSE (that is otherwise eligible for the Exclusion) is not subject to

comparable initial margin collection requirements in the home

jurisdiction and any of the risk associated with the uncleared swap is

transferred, directly or indirectly, through inter-affiliate swaps, to

a U.S. CSE or a U.S. Guaranteed CSE. Under the Final Margin Rule, a

CSE is not required to collect initial margin from its affiliate,

provided, among other things, that affiliate collects initial margin

on its market-facing swaps or is subject to comparable initial margin

collection requirements (in the case of non-U.S. affiliates that are

financial end-users) on their own market-facing swaps.

[[Page 34852]]

Appendices to Margin Requirements for Uncleared Swaps for Swap Dealers

and Major Swap Participants--Cross-Border Application of the Margin

Requirements--Commission Voting Summary, Chairman's Statement, and

Commissioners' Statements

Appendix 1--Commission Voting Summary

On this matter, Chairman Massad and Commissioner Bowen voted in

the affirmative. Commissioner Giancarlo voted in the negative.

Appendix 2--Statement of Chairman Timothy G. Massad

I am pleased that today, the Commission has adopted a cross-

border approach to our rule setting margin for uncleared swaps.

Our margin rule is one of the most important elements of swaps

market regulation set forth in the Dodd-Frank Act. Margin

requirements help ensure that uncleared swaps, which will always

remain a sizable portion of the market, do not generate excessive

uncollateralized risk. Last December, the Commission adopted a

strong and sensible margin rule. It requires swap dealers and major

swap participants to post and collect margin in their transactions

with one another, and with financial entities with which they have

significant exposures.

The risks our margin rule seeks to prevent do not only originate

in the United States. The interconnected nature of the global swaps

market means that risks created across the globe have the potential

to flow back into the United States. We recognize that having a

global swaps market is beneficial to all users. Therefore, one of

the most important objectives we already accomplished was to ensure

our margin rule is substantially similar to comparable international

rules. Harmonization is critical to creating a sound international

framework for regulation.

We also recognize that not all jurisdictions will adopt strong

margin rules. And even where rules are substantially harmonized,

there will still be some differences. Because cross-border

transactions are commonplace, we must clarify which rules apply in

different situations. Today, the Commission has acted to provide

that clarification.

First, we have drawn a clear, reasonable line as to when the

CFTC should take offshore risk into account. Today's action ensures

that our rule, or a comparable international measure, applies to

swap dealers that are foreign consolidated subsidiaries of a U.S.

parent. This helps address the risk that can flow back into the

United States from that offshore activity, even when the subsidiary

is not explicitly guaranteed by the U.S. parent. This treatment of

foreign consolidated subsidiaries--and our general cross-border

approach--is also consistent with the approach taken by the U.S.

prudential regulators.

At the same time, to further our efforts toward harmonization,

and to avoid conflicts with the rules of other jurisdictions, we

have provided for a broad scope of substituted compliance. Not only

will non-U.S. swap dealers be eligible for substituted compliance,

so will U.S. swap dealers with respect to the margin they post to

non-U.S. persons. This approach is an appropriate response to the

complex world created by the swap industry, where global swap

dealers can book a swap in a variety of ways. Dealers may book swaps

through different subsidiaries, branches or affiliates all over the

world, and they may do so based on a number of considerations, such

as the most favorable legal treatment. Our approach is intended to

protect our markets against risk coming from these cross-border

transactions, while taking into account the interests of other

regulators.

The process for conducting a comparability assessment of another

jurisdiction's rules is similar to what we have done in other areas.

The rule specifies the various factors that should be considered,

and indeed there is no reasonable way one can make a determination

without evaluating those factors. One important consideration will

be compliance with the international framework developed by the

Basel Committee on Banking Supervision and the International

Organization of Securities Commissions. Our approach will look at

the elements of each jurisdiction's rule set with an eye towards a

flexible, outcome-based determination. The process of making

comparability assessments can take time. In light of the impending

September 1 compliance date, I have asked the CFTC staff to work

closely with other domestic and international regulators, as well as

industry participants, and endeavor to effect a smooth transition.

The approach we have finalized today helps ensure the safety and

soundness of registered swap dealers, and reduces the potential for

conflict with the rules of other international regulators. I thank

all those who provided us with important feedback on these issues. I

also thank CFTC staff for their work on this rule, and my fellow

Commissioners for their careful consideration of this measure.

Appendix 3--Concurring Statement of Commissioner Sharon Y. Bowen

Margin and Capital as the Pillars of Market Safety

Margin and capital are two of the most important tools for risk

mitigation for the derivatives markets. Thus it is very important

that we get our rules on margin and capital right in order to

accomplish the reform required under the Dodd-Frank Wall Street

Reform and Consumer Protection Act.\290\ As many of you know, last

December, I voted against the final margin for uncleared swaps rule

because I did not believe that it was strong enough to fully protect

our system. As I said in December, adequate margin is fundamental to

market safety as it is a ``critical shock absorber for the bumps and

potholes of our financial markets and for the risk of contagion and

spillovers.'' \291\ I am even more confident in that view today.

---------------------------------------------------------------------------

\290\ Public Law 111-203, 124 Stat. 1376 (2010).

\291\ http://www.cftc.gov/PressRoom/SpeechesTestimony/bowenstatement121615a.

---------------------------------------------------------------------------

Today we vote on a critical supplement to that margin rule.

Specifically, today's rule would allow registered dealers to

substitute the margin rules of comparable jurisdictions for our

rules, when dealing with non-US counterparties, under certain

conditions. Needless to say, cross-border regulation is central to

our margin rule functioning effectively since our markets are

global.

I intend to vote yes for this cross-border rule because I want

to give the market legal certainty, as the first compliance date for

our margin rules, as well as those of regulators across

jurisdictions--September 1, 2016--looms.\292\ It is important that

market participants have enough time to prepare in advance of this

date so as to minimize market instability. We also want to minimize

the risk of creating regulatory arbitrage across jurisdictions.

While my concerns about our margin regime remain, I recognize that

there is no opportunity in today's cross-border margin decision to

remedy those errors.

---------------------------------------------------------------------------

\292\ Margin Requirements for Uncleared Swaps for Swap Dealers

and Major Swap Participants, 81 FR 636, 675 (Jan. 6, 2016).

---------------------------------------------------------------------------

One of the major drawbacks of our margin rulemaking is that it

was not done in conjunction with our capital rulemaking. Margin and

capital are intertwined--if our margin rule is weak, our capital

rule needs to be stronger to compensate. If both are strong,

investors and consumers can be confident that we have learned the

lessons of the past, and have placed adequate protections in place

against future financial instability. But, if both are weak, we have

surrendered our best defenses against contagion. We put the

interests of our investors at risk when we view regulation in a

piecemeal and non-comprehensive fashion, because we are not seeing

the whole picture. So, as I vote today on cross-border margin, my

mind is on our upcoming capital rule proposal.

Any firm that aspires to be a swap dealer is aspiring to be a

significant player in our economy. They must have the capacity to

not only stand ready to be the buyer to each seller and the seller

to each buyer, but to maintain those positions over years. Their

creditworthiness must be above reproach. In that way, market

participants, including commercial end-users who need to hedge, can

be confident that their dealer will be there during times of

stability and crisis. It is therefore critical to the health of our

economy that the market trusts, and with good reason, that our

dealers are robust and steadfast--that they are able to withstand

the financial swings that are endemic to today's economy. Thus while

strong capital rules may prevent some entities from entering the

dealing business, they ultimately benefit the dealers, their

customers and the whole economy.

In order to create a capital rule that appropriately manages

risk for the American people and our critical economy, our capital

rule proposal must:

(1) Not Be Weaker Than Our Comparable Prudential Regulators'

Rule: The capital proposal, and subsequent final rule, must be as

strong as those of the Prudential Regulators. We are required under

law to establish minimum capital requirements that are

``comparable'' to our Prudential Regulator counterparts ``to the

maximum extent

[[Page 34853]]

practicable.'' \293\ Not only is this our legal obligation, but it

is a sensible one as it prevents entities from gaming the system,

and organizing their businesses in order to have the lowest capital

requirements possible. We do not want our regulatory framework to be

an escape hatch from strong risk management.

---------------------------------------------------------------------------

\293\ Commodity Exchange Act (CEA) 6s(e)(3)(D).

---------------------------------------------------------------------------

(2) Account for the Entire Risk to the Dealer: The capital

proposal should also require dealers to hold sufficient capital to

cover the entirety of the risk posed by the full gamut of

derivatives products that they hold--including those products,

which, for various reasons, we did not impose a margin requirement,

such as inter-affiliate swaps and swaps with financial

counterparties that are below the $8 billion threshold. This is

consistent with our mandate under law to ``take into account the

risks associated with other types of swaps or classes of swaps or

categories of swaps engaged in and the other activities conducted by

that person that are not otherwise subject to regulation. . . .''

\294\ This is an important requirement. The Congressional authors

understood that just because a particular category of swaps that a

dealer holds are not subject to a regulatory requirement, does not

mean that the dealers, and therefore their customers, are not

vulnerable to the risk posed by them.

---------------------------------------------------------------------------

\294\ CEA 6s(e)(2)(C).

---------------------------------------------------------------------------

(3) Include Effective Elements of Strong Capital Models: Our

capital proposal should take into consideration respected, and

effective capital models from other regulators. As of now, we have

two well-regarded capital models: The Basel rules for banks, and the

Securities and Exchange Commission's (SEC's) rule for Broker-

Dealers. The Basel rule has many positive attributes--including the

fact that it not only has strong capital requirements but also a

liquidity, leverage and funding ratio.\295\ We need look no further

than financial companies before the 2008 crisis to understand the

need for leverage requirements. For instance, it was estimated that,

prior to the crisis, some firms had debt that was 30 to 40 times

their net capital.\296\ And we have very present examples of

commercial companies that evidence the need for funding

requirements.\297\ The SEC's broker dealer rule also has its

positives including that it does not allow for internal models,

which came under fire after the crisis for allowing excessive

leverage,\298\ and it is liquidity-based such that the dealer is

obligated to maintain highly liquid assets to cover its

liabilities.\299\ Our capital rule proposal should be as strong, if

not stronger, than these models.

---------------------------------------------------------------------------

\295\ With the exception of the capital charge to the segregated

customer funds that have been set aside to secure cleared products.

See ``Speech of Commissioner Sharon Y. Bowen at George Washington

Law, 2016 Manuel F. Cohen Lecture,'' Feb. 4, 2016, available at

http://www.cftc.gov/PressRoom/SpeechesTestimony/opabowen-8.

\296\ E.g., Julie Satow, ``Ex-SEC Official Blames Agency for

Blow-Up of Broker-Dealers,'' The New York Sun (September 18, 2008)

(``[B]roker dealers . . . [had] debt-to-net-capital ratios,

sometimes, as in the case of Merrill Lynch, to as high as 40-to-

1.''), available at http://www.nysun.com/business/ex-sec-official-blames-agency-for-blow-up/86130/; Alan S. Blinder, ``Six Errors on

the Path to the Financial Crisis,'' New York Times (January 25,

2009) (stating that in 2008, securities firms had leverage ratios of

``33 to 1''), available at http://www.nytimes.com/2009/01/25/business/economy/25view.html?_r=0.

\297\ Jasmine Ng and David Yong, ``Noble Group Gets $3 Billion

in Credit Facilities,'' Bloomberg.com (May 12, 2016), available at

http://www.bloomberg.com/news/articles/2016-05-12/noble-group-agrees-3-billion-credit-facilities-with-lenders. See also Sarah

Kent, Scott Patterson, and Margot Patrick, ``Glencore Discloses More

Details on Financing,'' The Wall Street Journal (October 7, 2015),

available at http://www.wsj.com/articles/glencore-reveals-financing-deals-to-fend-off-critics-1444137982.

\298\ See supra note 7.

\299\ Securities Exchange Act (SEA) Rule 15c3-1.

---------------------------------------------------------------------------

(4) Address Risks Posed by Swap-Dealing of Non-Financial

Companies: Some commercial entities are also registered as swap

dealers, and others may decide to do so in the future. Having

commercial end-users that are engaging in more than a de minimis

amount of swap dealing may increase market risk. Thus it is

important that we are able to isolate their swap dealing business

from the regular business, so that we can properly track their

activities as a dealer.

(5) Be Based on Data-Driven Risk Assessment, Not Industry

Preference: As a regulator, anything that we propose needs to be

based on our data-driven risk assessment, not on the desire to

ensure that all entities that want to be dealers are able to

maintain their current business models without any changes. In

response to our proposal, market participants are then free to

provide data to explain why our risk assessment may be inappropriate

and to inform us of the pragmatic restraints. While encouraging more

entrants into the market maybe a regulatory goal, doing all we can

to prevent the next catastrophic financial crisis that wipes out

pensions, is our fundamental goal.

Experience has taught us that comprehensive, well-considered

review is critical when considering major regulations. Ten years

ago, too many people in industry did not engage in such well-

considered review when crafting complicated financial deals. In the

end, that lack of consideration came back to haunt us all when the

mortgage bubble burst and unexpectedly exposed many large financial

institutions to massive losses that threatened the entire financial

system. In the end, the American public had to save the system at

great expense, and the ensuing rescue left many angry, alienated,

and disaffected. Today, nearly eight years later, that anger still

exists. We all pay a great price when we move forward in finance

with insufficient analysis and review.

Thus, for the sake of market certainty, I am voting yes to this

rule. But I encourage my fellow Commissioners to work with me to

develop a strong, comprehensive capital rule so that the American

people can have the appropriate safeguards to secure our economy.

Thank you.

Appendix 4--Statement of Dissent by Commissioner J. Christopher

Giancarlo

I respectfully dissent from the final rule on the cross-border

application of margin requirements for uncleared swaps.

In September 2009, the leaders of the G-20 countries agreed to

launch a framework for ``strong, sustainable and balanced global

growth'' to generate ``a durable recovery that creates the good jobs

our people need.'' \1\ The agreement included a commitment ``to take

action at the national and international level to raise standards

together so that our national authorities implement global standards

consistently in a way that ensures a level playing field and avoids

fragmentation of markets, protectionism, and regulatory arbitrage.''

\2\

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\1\ G-20 Leaders' Statement, The Pittsburgh Summit, Preamble at

par. 13 (Sept. 24-25, 2009).

\2\ Id. at par. 12.

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In keeping with that agreement, representatives of more than 20

regulatory authorities, including the CFTC, participated in

consultations with the Basel Committee on Banking Supervision

(``BCBS'') and the Board of the International Organization of

Securities Commissions (``IOSCO'') to develop an international

framework setting margin standards for uncleared derivatives

(``BCBS-IOSCO framework'').\3\ That 2013 framework stresses the

importance of developing consistent requirements across

jurisdictions to avoid conflicting or duplicative standards.\4\

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\3\ Margin Requirements for Non-centrally Cleared Derivatives

(Sept. 2013), available at http://www.bis.org/publ/bcbs261.pdf,

revised Mar. 2015, available at http://www.bis.org/bcbs/publ/d317.pdf.

\4\ Id. at 23.

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Today, instead of recognizing and building upon the strong

foundation for mutual recognition of foreign regulatory regimes

created by the G-20 commitments and the BCBS-IOSCO framework, as

well as the CFTC's own history of using a principles-based, holistic

approach to comparability determinations,\5\ the Commission is

adopting a set of preconditions to substituted

[[Page 34854]]

compliance that is overly complex, unduly narrow and operationally

impractical.

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\5\ The CFTC has a long history of working collaboratively with

foreign regulators to facilitate cross-border business. For example,

under Commission Regulation 30.10, adopted in 1987, if the CFTC

determines that a foreign regulatory regime offers comparable

protections to U.S. customers transacting in foreign futures and

options, and there is an appropriate information-sharing arrangement

in place, the CFTC has allowed foreign brokers to comply with their

home-country regulations in lieu of Commission regulations.

Similarly, since 1996 the Commission has permitted direct access by

U.S. customers to foreign boards of trade (``FBOTs'') without

requiring the FBOT to register with the CFTC as a derivatives

contract market (``DCM''). In determining the comparability of the

foreign regulatory regime the Commission does not engage in a line-

by-line examination of the foreign regulator's approach to

supervising the FBOT it regulates. Rather, the Commission conducts a

principles-based review to determine whether the foreign regime

supports and enforces regulatory oversight of the FBOT and its

clearing organization in a substantially equivalent manner as that

used by the CFTC in its oversight of DCMs and clearing

organizations. See Registration of Foreign Boards of Trade, 76 FR

80674, 80680 (Dec. 23, 2011).

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First, the rule establishes a complicated matrix of potential

cross-border counterparties under which substituted compliance is

either not permitted, is partially permitted, or is fully permitted,

depending upon the category in which the particular transaction

fits. Next, where permitted, the CFTC will conduct an ``element-by-

element'' analysis of CFTC and foreign margin rules under which a

transaction may be subject to a patchwork of U.S. and foreign

regulation.\6\ The CFTC will follow this ``element-by-element''

approach instead of assessing a foreign authority's margin regime as

a whole.

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\6\ Such a result would be antithetical to element seven of the

BCBS-IOSCO framework, which requires that there be no application of

duplicative or conflicting margin requirements to the same

transaction or activity. The framework advises that ``[w]hen a

transaction is subject to two sets of rules (duplicative

requirements), the home and the host regulators should endeavor to

(1) harmonize the rules to the extent possible or (2) apply only one

set of rules, by recognizing the equivalence and comparability of

their respective rules.'' BCBS-IOSCO framework at 23.

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In response to commenters who observed that today's approach

will undermine the BCBS-IOSCO framework, the Commission acknowledges

that consistency with the framework is necessary, but argues that

the framework leaves certain elements open to interpretation by each

regulator, including the CFTC.\7\ For these elements, the Commission

undertakes to use an outcome-based analysis, but will also engage in

a fact-specific inquiry of each legal and regulatory provision that

corresponds to each element.

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\7\ In footnote 232 of the preamble the Commission cites, for

example, the definition of ``derivative,'' the list of assets

eligible to post as collateral, the degree to which margin would be

protected under the local bankruptcy regime, and how transactions

with affiliates are treated.

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In effect, the Commission's approach is somewhat principles-

based, except when it is rules-based and somewhat objective, except

when it is subjective.

Today's muddled methodology invites foreign regulators to

respond in kind. It may well set us off down the same protracted,

circuitous and uncertain path that the CFTC and the European Union

took in the context of U.S. central counterparty clearinghouse

equivalence. The approach is impractical, unnecessary and contrary

to the cooperative spirit of the 2009 G-20 Pittsburgh Accords.\8\

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\8\ I am also concerned about the Commission's unwillingness to

delay the cross-border application of its margin rules until after

it has made comparability determinations. This will bring into the

CFTC's regulatory ambit many cross-border transactions over which

U.S. jurisdiction is inappropriate and an undue drain on precious

regulatory resources.

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Rather than conducting a granular rule-by-rule comparison, the

CFTC should focus on whether a foreign regulator's margin regime, in

the aggregate, provides a sufficient level of risk mitigation in

connection with the execution of uncleared swaps. The BCBS-IOSCO

framework does just that. Compliance with it should be

straightforward and unconditional to prevent the ``fragmentation of

markets, protectionism, and regulatory arbitrage'' that global

regulators were charged to avoid.

As confusing as this rule is, what is important is not that hard

to understand. American workers need quality American jobs. They

need them in factories, farms and offices across the United States.

The businesses that employ them want to sell their goods and

services both here and abroad. To succeed globally, American

businesses need U.S.-based financial institutions to support them

around the world with competitively priced risk management services.

Unfortunately, this complicated rule will make it harder for

U.S. financial institutions to compete globally and serve American

businesses. When businesses are placed at a competitive

disadvantage, they hire fewer workers. With over 94 million

Americans now out of the workforce,\9\ that is unacceptable.

Therefore, I oppose this rule--it's that simple.

\9\ Bureau of Labor Statistics, The Employment Situation--April

2016, U.S. DEPARTMENT OF LABOR, May 6, 2016, http://www.bls.gov/news.release/empsit.nr0.htm.

[FR Doc. 2016-12612 Filed 5-27-16; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: May 31, 2016